Square Inc. Set to Rise in 2020

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. 

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Square, the payment processing company that has helped many small businesses accept credit cards and other forms of payment, has been a battleground for both bulls and bears.

The bears have great reasons for why Square deserves a lower valuation. One reason is that it's unprofitable. When looking up Square's stock on Google, the company doesn't have a PE ratio since it hasn't had 4 straight quarters of profitability. Since Square has been investing a lot into their ecosystem, they haven't been able to show profits. Also, some bears say that having Jack Dorsey be CEO in two companies is a significant risk. What made this fear worse was then Dorsey told the media that he will go to Africa for quite sometime.

Meanwhile, the bulls have great reasons for Square's stock price to go higher. One reason is that the company will eventually become profitable. When looking at Yahoo Finance and seeing the free cash flow numbers for Square, it's interesting to note that Square has been free cash flow positive since 2017. Like Amazon back then, Square has been free cash flow positive despite not reporting any profits. Also, the business model of Square allows the company to capitalize on the increase of consumer spending. By giving merchants the equipment for free and inputting payment processing charges on customers, Square has not only been able to alleviate some pressure from merchants, but has been able to capitalize on the growth of many small businesses. Also, Square has been able to capitalize on Cash App, its P2P money transfer app. This app is a direct competitor to Venmo. Recently, Square has allowed users to trade fractional shares and buy bitcoin with the Cash App.

All of these reasons has made Square a battleground. For me, despite the great reasons the bears have on Square, I'm bullish on Square and here are the reasons why I'm bullish.

1) Their overall bottom line is growing

Extracted from Square's Q3 2019 Shareholder Letter

When looking at the chart that sums up Square's overall business from their Q3 2019 Shareholder Letter, their overall bottom line is growing. As revenue increases, gross profits increase, which shows that there isn't a problem with diseconomies of scale. Payment volumes have been increases as Square is not only capitalizing the growth of their clients' businesses, but that they're getting more clients. 

Also, if you look below the charts, Square has invested in Eventbrite Inc. and has been able to capitalize on the IPO. The company has invested in other companies like Caviar (which it later sold to DoorDash). It's interesting to see Square diversify its business.

2) Square is about to make money from Cash App

Square's Cash App have been seen as a money loser by investors. When people make cash transfers to each other, Square doesn't charge them any fees. Same thing with Venmo (in my experience, not sure if that changed). But, with the company charging people for making transactions with bitcoin, the Cash App is making some revenue for the company. 

Now the transfer of money is still free for users, but management plans to make money from its Cash App by selling users to other services. The Motley Fool writer Adam Levy describes how Square's Cash App can break even, saying how it's pushing customers to use the Cash App. For employers using Square Payroll, they can use the Cash App to transfer money to their employees faster, which levy describes it as "an advantage Venmo can't compete with." This not only adds a moat to the Cash App but makes it even more enticing for employers to use Square's services rather than PayPal's or other payroll processor services. 

Furthermore, the company plans to sell users on other services. Since the Cash App does charge users for transacting in bitcoin, Square can make money from users wanting to make transactions in bitcoin. Also, they can entice users on Square's free trading service, which makes Square a competitor of Robinhood. Though Square doesn't charge commissions on trades, it can make money from the brokerage service through selling order flow or by enticing customers to use its bitcoin service. 

3) Square plays a role in the rise of E-commerce

With the rise in e-commerce, Square has found ways to benefit in the rising trend. Since Square provides payment processing services to many small businesses, the company has a unique relationship with many small businesses in America. Since many entrepreneurs that had success with selling in physical stores want to expand into the digital world, expanding online is expensive. Besides the subscription expenses, entrepreneurs have to pay for SEO, social media marketing, web design, etc. 

To help entrepreneurs and benefit from their growth on the online world, Square created a service to allow their clients to create a free e-commerce website on their platform and integrate Square's payment processing service on it. This will help Square benefit from the rise of e-commerce. Furthermore, Square is giving sellers on eBay lending services. With many sellers of the online world using their own cash to source inventory, having access to Square's lending services will help many of these sellers expand their business. 

Though this may be a small segment of the company, the payment processing aspect of it will help Square's bottom line. 

Conclusion

Overall, with the bottom line growing, Square's business has been doing well. Looking forward, the Cash App, which Square invested a lot of capital in, is going to start giving investors and the company profits. With Square providing tools for entrepreneurs to expand into the online world, Square will be able to benefit from the rise in e-commerce. All of these reasons are why I'm bullish on Square Inc. 

This stock has been a battleground for bulls and bears, and may continue to be a battleground with neither side giving up. With the risk of black swans and economic uncertainty, this stock does hold risk. Anything that will affect consumer spending will affect Square directly as the company's services makes money from the increase in consumer spending. 

This blog post is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. The writer of this blog is not licensed and doesn't have any positions in the stocks mentioned. Please see a financial advisor for financial advice.