Square: Why I still love the company

As Square is my largest investment, I wanted to take the opportunity of these recent bad days in the market to write my thoughts on the company. Mostly good though with a few mixed feelings as no company is perfect. I won’t talk about numbers as those have been examined repeatedly in depth. On this board we all know how fast Square is growing and how fantastic the numbers look. Instead, here are my personal perspectives on the less easy to quantify aspects of the business.

My primary interest in Square is that they enable small businesses with tools historically available only to large corporations. In the U.S., it is commonly stated, “small businesses are the backbone of the Economy.” (See footnote #1 for an article on this) The growth opportunity in this (for Square) is enormous and, I believe, underappreciated.

Square is not a one trick pony. Square continues to innovate. They add new products and services steadily over time and improve their existing lineup of products and services. They are actively growing and learning from what goes right … and more importantly learning from their failures. Management seems to have a very good growth mindset (2) for succeeding in business.

Square’s services will likely become more important to small businesses over time. In the internet era we live in, a small business dealing only in cash with no internet presence and no access to large corporation quality financial services already finds itself at a disadvantage compared to its competitors (in this case, the store across the street which is fully integrated with Square). This trend is likely to continue as understanding of the benefits of using Square and similar services spreads.

Square has a large advantage over its competition in multiple ways yet one stands out to me: Square continues to innovate and now has an entire framework of products and services which enable small businesses while its competitors are often limited in scope and simply following along with the idea. Some of the competition has a separate niche. Some competitors simply operate in different parts of the world though even there they seem to always provide far more limited capabilities compared to Square (e.g. iZettle in Europe).

The market seems to be panicking over Sarah Friar leaving Square yet I am not worried because Jack Dorsey is still CEO. As much as I trust any CEO, Jack Dorsey seems a good leader. A quote of his which, I hope, is accurate: “If I have to make a decision, we have an organizational failure. I can help provide context of what’s happening in the industry. But I definitely see the organization and the people in it as the ones to make the decisions, because they have the greatest context for what needs to be done.” My guess is we will find that Sarah Friar leaving is more of a PR blow than a real loss to the company.

My biggest concern is for Square Installments, a concern shared by the market if the stock price drop on announcing the service is any sort of indication. This is the first offering by Square which while highly beneficial for small businesses, potentially exposes Square itself to significant risk. It also encourages consumer debt spending which I find highly distasteful.

Valuation. It is hard to say this stock is undervalued even after dropping roughly 30% this month. A lot of hopes for the future are baked into this high stock price. However, those hopes for the future seem to have significant grounding in reality I also can’t see the stock price as overvalued, even before the recent drop. This isn’t a 2000 era internet bubble stock with no product, this isn’t a company burning money at a fast rate and talking a good line. This is a stable and growing company with a proven product line, diverse customers, and continuing innovation. A lot of possibilities exist in the future of this company. Yet as those possibilities are both diverse and still yet to be realized, the stock price fluctuates. No surprise at all to see a 30% drop, especially when hit with a series of significant events of unknown impact (The tech sector selloff, Square Installments and Sarah Friar leaving).

I for one am happy to be an investor in Square.

Footnotes:

(1) https://www.inc.com/jared-hecht/are-small-businesses-really-…
(2) Related book: “Mindset” by Carl Dweck"

34 Likes

that Carl Dweck book ‘Mindset’, is that the one Shopify’s Tobi mentioned in a recent podcast?

It’s Carol Dweck. Not Carl. Just FYI. Fabulous book/study.

  • Khleb
1 Like

khlebnikov: It’s Carol Dweck. Not Carl. Just FYI. Fabulous book/study.

Khleb, you are correct, thank you for catching that typol! The hazard of being a touch typist!

thejusticier: Very likely it is the same book, I have not listened to that podcast. The section dedicated to businesses is relatively small yet the entire book applies. Probably one of the best books I’ve read simply because the idea is so fundamental to everything in life. Particularly important to our investing strategy because the growth mindset Carol Dweck talks about is a major differentiator between companies that truly succeed (such as seems the case with Square) and those that look good initially but ultimately fail.

1 Like