Hochfeld released another piece today discussing Square, the payments solution company. As Bert does, in the article he rambles a bit, jumbling his thoughts, because he knows so much about the companies he writes about.
But one concept he seems to keep returning to about Square is that its moat exists not because of any one of its products, but because it offers such a breadth of products and services. This simplifies so many things for entrepreneurs starting their first business, whether its a proud new food truck owner or a tech startup.
For instance, while some payments companies offer some nearly identical services as Square - from mobile readers to instant deposit to loans - I do not know of any that offer payroll services. I wonder if Intuit does? But lesser payments companies, like TSS or GPN certainly do not. From Hochfeld’s piece:
The most obvious example of this is the synergy between Square Capital and the Square payment processing business. Square Capital is completely dependent on Square payment processing to find its customers. Its special sauce is that it costs almost nothing for Square Capital to acquire customers, and it is able to make loan decisions both more quickly and more effectively than bank rivals who do not have the ability to use a company’s own revenues as security for a loan. Given that Square raises 3rd party capital to fund its loans (merchant cash advances), and that it can service loans from its own payment platform, Square has invented one of the more potentially lucrative undertakings in the IT world. While Square Capital’s APR on its loans is high, the implied APR on the instant deposit option is remarkable. The CFO called it a high margin product since it is able to charge 1% for overnight access to money, which is as good as it gets.
While there is a strong temptation to simply look at the opportunities Square has in loaning other people’s money to its sellers at extraordinary rates of interest, the fact is that it really does offer a host of technologies that most of its customers will find useful. In aggregate, the company sold $35 million of what it calls software and data products. Most of that revenue is from Capital, Caviar and Instant Deposit, but the opportunities that this company has to sell just pure software is substantial. It is far easier for potential users to contract with Square for their requirements in terms of payroll, CRM and analytics than it is to try to select different products from different users and try to integrate the results.
Again, there is a huge amount of software designed and sold to SMB’s and it hard for most users to choose between all of the different offerings. There is nothing in Square’s software solutions that is particularly unique or cutting edge but it is easier and cheaper together, at least in terms of the total cost of ownership.
Read the entire piece at http://seekingalpha.com/article/4034012-square-becoming-warm…
Make no mistake, in the short to medium term any Square investing thesis is all about the company growing its payments services and then up-selling its customers its more lucrative services, like Instant Deposit and Square Capital.
But in the long term, CEO Jack Dorsey’s vision is much bigger. I think he wants Square to be a one-stop shop for small/medium businesses offering everything from loans to payroll to data analytics to payments services. I find this very interesting.
There are challenges to this vision of course. I think it is far from certain Square ever accomplishes these grandiose goals. For starters, the company is still not profitable, loses a lot of money on every single piece of hardware it sells, and I’m still not all certain Dorsey wouldn’t just rather be Twitter’s full-time CEO. If Dorsey’s not going to be at Square for long, I’m a lot less interested in Square as an investment.
Plus, I’m also not sure that offering all of these services (let’s not forget Caviar, a restaurant delivery service which Square acquired a couple of years ago) is more distracting than productive. Amazon didn’t try to be everything at once, it started by selling books and then slowly added more merchandise and services atop that foundation. I truly wonder if Dorsey is biting off more than he can chew.
But the long term vision is interesting. I think its David Gardner who says he likes companies with future “optionality”. Or companies with multiple futures. Something like that. Ah, here’s a good definition of optionality as I am using it:
Optionality
This means he looks for companies that have current or future earnings options. Potential multiple streams of income, to you and me. He mentioned in a Motley Fool ( which he started with his brother) interview that this separates him from Buffett ( who he couldn’t be more different from in investing style).
David Gardner wants to find companies that have the potential to turn into Amazon type stocks ( his 100+ bagger) that do many different things, not just selling books like they used to. Amazon sell everything, went into tablets, are doing cloud storage and a ton of other things. Multiple revenue streams. See’s candy still just mostly sells candy.
From http://waystofattenyourwallet.blogspot.com/2014/03/insight-i…
Well, I’m going to stop here as I am rambling and probably jumbling thoughts together just as I accused Hochfeld of doing in this same post! But Square has lots of optionality as I see it. And it intrigues me.
Matt
No position in Square
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