When PayPal (NASDAQ: PYPL) founders Peter Thiel and Max Levchin ventured to make digital payments cost effective and effortless nearly two decades ago, little did they know it’d become a $125 billion company leading the way to a cashless society.
While PayPal specializes in being a trusted mediator for transferring money between two parties, other competitors like Square (NYSE: SQ) are seeking the same growth opportunity, but with a slightly different approach.
Could Square become the next PayPal? Being about one-fifth of the size of PayPal, having built a promising product, with their hands in multiple areas of the payments sector, Square makes for an ideal candidate.
An Overview of Square as a Company
Square is the go-to payment processing product for startups, small, and medium sized businesses. As a business owner, figuring out how to quickly begin accepting payments from your customers is a tedious task. That’s where Square comes in.
Currently worth $25 billion, Square now operates in multiple areas of the digital payments industry including:
- Online and offline payment processing, including invoicing.
- Point of sale merchant hardware.
- Square appointments — a product that allows businesses to accept and send appointment invites for their clients.
- eCommerce solutions including a website builder. Square acquired Weebly, an website builder that requires no prior coding experience.
- Peer to peer payments through Square’s Cash App.
- Free investing options through Square’s Cash App.
- Square Capital — access to small business loans.
- Square Payroll.
- Square business debit cards — a debit card that gives you access to your money within Square immediately.
- Other small business tools such as team management, marketing services, loyalty programs and even gift cards for your business.
Its suite of products is specific to the payments sector, but broad within. Could its broad approach to a suite of small business payment solutions give it a major competitive advantage over current market leaders like PayPal?
Fundamental Analysis of Square
Aside from the fact that Square is a great product used by millions of consumers and businesses worldwide, here are a few fundamental reasons I like the looks of Square as a major investment opportunity:
- Return on Equity (trailing twelve months) is currently 26.48%
- Current revenue growth year over year is 40.80%
- Square has $1.54 billion in cash with less in debt ($1.08 billion debt)
- Levered free cash flow of $253.24 million
- The coronavirus has had major market consequences, posing many great buying opportunities for solid companies with solid fundamentals. As of right now, it could be said that Square is on sale for over 30% off!
Potential Problems Square May Face…
With every potential reward comes potential risks, and bigger rewards beget bigger risks. Three major risks that Square could face are:
- Current CEO & Founder of Two Major Companies: Square’s founder and CEO Jack Dorsey is also the founder and CEO of Twitter (NYSE: TWTR). This means that Dorsey has many hats to wear as CEO of two large publicly traded companies. Does this mean Jack Dorsey is a successful and visionary CEO? Or, does it mean he is stretched too thin and can’t possibly grow two major companies?
- “The Amazon Effect:” Iit seems that Amazon (NASDAQ: AMZN) has a goal of taking over every industry they can get their hands on, and its size and influence gives it an upper hand in doing so. How does this apply to Square? Who is to say that digital payments industry leaders like Visa (NYSE: V), PayPal, and Fiserv (NASDAQ: FISV) won’t jump in on Square’s growing products and services market share?
- Security Risks: Working with other people’s personal information including their hard earned money, bank accounts, social security numbers, etc. for obvious reasons poses a major risk if Square doesn’t make security its top priority.
Can Square Become The Next PayPal?
When considering the potential of a growing company like Square, I like to look at it’s industry leaders, the company’s size, and what Square is doing differently that gives it a chance to grow to be a market contender.
Its growth is obvious, its balance sheet is solid and its product is already ingrained in thousands of growing businesses to stay. Seeing that Square is a $25 billion company, and PayPal has grown to $125 billion from just B2B, B2C and C2C payment transactions alone, I think Square is the number one company that may pose as a potential “ten-bagger” investment.
Square earnings preview
It’s been a bumpy few months for Square as the economy reels from the effects of the coronavirus. Square on March 24 withdrew its full-year 2020 guidance and lowered its Q1 revenue outlook to between $1.30 to $1.34 billion. This was down from its pre-coronavirus guidance that called for between $1.34 to $1.36 billion in first quarter revenue.
Its earnings call for Q1 2020 will be held on Wednesday, 6 May, with analysts expecting revenue to jump 36% to reach $1.30 billion
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Contributing Writer at MyWallSt
Cameron Williams is a contributing writer here at MyWallSt and focuses on finance and investment-related topics.