Is SQ a buy?

Interesting TMF article asks the question of if SQ is a buy and compares SQ with PayPal, SHOP and Intuit. Author notes SQ’s higher risk, lack of GAAP profitability, valuation and not having much of a real moat in spite of growing 400% in the recent past. Thoughts?


“…Does Square have a moat?
There’s a growing number of competitors in the small-merchant payments processing space Square carved out in the early part of the decade. PayPal (NASDAQ:PYPL) has been active in the arena, as have Intuit (NASDAQ:INTU) andShopify(NYSE:SHOP).While those three are primarily software-based payment processing systems, they already have established relationships with millions of small and medium-sized businesses. Not to mention there are dozens of foreign companies and established point-of-sale system providers that Square will face as it moves to expand its market internationally and tries to appeal to bigger merchants.

As such, it’s important Square exhibits some sort of competitive advantage – a moat. Management points to its growing ecosystem of services and tools that work in conjunction with Square’s core payment processing service as its competitive advantage. Indeed, customers that use multiple Square products – for example, payment processing, Square Capital, and its payroll service – are less likely to switch to a competing platform.

But that’s not much of a competitive advantage. That knife cuts both ways. PayPal, Intuit, and Shopify all have their own unique suites of tools for merchants, and some options may fit the needs of merchants better than Square’s. Square’s additional services don’t necessarily work to attract new customers in the first place.

The impact is seen in Square’s gross margin. Square’s gross margin over the trailing twelve months is 37%. Shopify and Intuit have posted gross margins of 56% and 84%, respectively, during the same period. Square takes a relatively small loss on its hardware sales, but the core operations still don’t make up for the margin difference between itself and competitors.

A rapidly growing business
Despite only a small competitive advantage, Square is managing to grow rapidly. The company is investing heavily in new services and expanding its existing products to meet the needs of its customers. That helps with retention and increases revenue per merchant. It also helps stave off the growing competition, as Square has no other moat. Square is also spending heavily on marketing at it enters new markets and faces new competition…”



To clarify, I believe SQ is a buy at 8% of my current portfolio and after purchasing more on this dip. Interested in others perspective on points made in TMF article.

After all the articles reservations they do say that Square should be able to grow at least 30% per year for the next five years. (That would make it 3.7 times as big as it is now).