Best Fintech Stocks - SQ

Investment Analysis Clubs Saul’s Investing Discussions
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I recently wrote an article highlighting what I believe are the best stocks to invest in fintech and Square was one of the companies I highlighted (along with PayPal and Mastercard). Here’s what I wrote about Square:

The payment processor industry was once a largely commoditized service space. Basically, payment processing companies had to offer merchants hardware that accepted plastic at the point-of-sale. That has changed, in large part, due to what Square has brought to the table. Square’s original goal was to make it much easier for small merchants to accept card payments. It accomplished this by allowing a small iPhone or iPad attachment to accomplish what once required much bulkier hardware. Square has continued to innovate in the space, introducing software that allowed Square vendors to process EMV chip-embedded cards faster and introducing platforms that are specific to different merchants’ needs, like Square for Retail.

Square is now reaching beyond its core competency to innovate in other areas of payments as well. For instance, its hugely successful Square Capital program offers small- and medium-sized businesses microloans not often available for these businesses through traditional banks. Its Instant Deposit service allows its clients to receive funds instantly upon swiping a customer’s credit or debit card; a process that traditionally takes up to three to four days, creating cash flow problems for small businesses. Caviar, acquired in 2014 as a restaurant delivery service, is now a much more robust food platform offering a mobile order-ahead feature available for use by subscribing restaurants.

These additional services have proven to be lucrative for Square. Reported under its subscription and services-based revenue, the category grew an incredible 106% year-over-year and contributed to the company’s adjusted revenue annual growth of 39%. Based on the midpoint of the company’s guidance for full year adjusted earnings, the company sports a nosebleed-level forward P/E of almost 150. But the innovation the company shows is leading to outsized growth and investors in the company have been richly rewarded thus far this year.

Read more at https://www.fool.com/investing/2017/07/23/the-three-best-sto…

I would also add that the payment processing industry is definitely taking notice of how Square is offering additional software solutions to small/medium businesses for additional revenue. The industry has seen lots of acquisitions lately along these lines. Last month Vantiv acquired WorldPay for $10B and First Data made this acquisition: https://www.fool.com/investing/2017/07/22/first-datas-750-mi…

IMHO, it does seem like an effort by the biggest players in the space to keep up with the likes of Square. So far, I don’t think its enough but it is something to keep an eye on.

Matt
Long MA, PYPL, SQ
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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These additional services have proven to be lucrative for Square. Reported under its subscription and services-based revenue, the category grew an incredible 106% year-over-year and contributed to the company’s adjusted revenue annual growth of 39%. Based on the midpoint of the company’s guidance for full year adjusted earnings, the company sports a nosebleed-level forward P/E of almost 150. But the innovation the company shows is leading to outsized growth and investors in the company have been richly rewarded thus far this year.

Thanks Matt. The high P/E is in large part due to the fact that SQ just turned a profit. P/E is probably not the best metric for SQ at its current stage of development as a company.

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Thanks Matt. The high P/E is in large part due to the fact that SQ just turned a profit. P/E is probably not the best metric for SQ at its current stage of development as a company.

Hi Matt,
I have to agree with Chris. To talk about PE with a company that just turned profitable is meaningless. To talk about a “nosebleed level” is misinforming the reader if it doesn’t come with an explanation. Next quarter the PE could conceivably drop precipitously, without anything unusual happening.
Saul

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I have to agree with Chris. To talk about PE with a company that just turned profitable is meaningless. To talk about a “nosebleed level” is misinforming the reader if it doesn’t come with an explanation. Next quarter the PE could conceivably drop precipitously, without anything unusual happening.

I have to agree too. Here’s some irresponsible guesswork on the topic from my June portfolio review:

Square turned in a great March quarter: beats on top and bottom lines, raised guidance. But what looks most interesting is that you can really start to see their path to profitability. The speed with which they’ve gone from barely even showing any gross profit to suddenly showing net profit is amazing. I’ll even go out on a limb and suggest GAAP profit is possible. If they hit their 535M guidance for total revenue in Q2, I’d expect gross profit to be over 200M…up from 173M sequentially! Pretty incredible. Then it’s just a matter of keeping their operating expenses in check: they were 188M this quarter, so even if they keep it within 5% of that, they should show GAAP profit.

Bear

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