Mobile Point Of Sales - Square, Inc.

| About: Square, Inc. (SQ)

Summary

Mobile POS market expected to increase 400 pct by 2019.

Square's EBITDA +$13 million in Q2 2016.

The company is losing $2 for every $1 of hardware sales amidst a challenging credit market.

Square still raising its full-year revenue guidance.

Square Register allows individuals and merchants in the United States, Canada, Japan and Australia to accept offline debit and credit cards on iOS, Android smartphone or tablet computer. This fairly new application software supports manually entering credit card details on top of swiping the card through the small plastic device that plugs into the audio jack of any supported smartphone or tablet to read the magnetic strip. On the iPad version of the Square Register app, the interface resembles a traditional cash register.

A report back in 2015 from 451 Research predicted that the global install base of mPOS will increase four times to just over 54 million units at a 32 percent compound annual growth rate in 2019, from the current 13 million devices on the market today. "At a high level, there are more mobile lines than there are people and mobile phones are becoming ubiquitous," according to Jordan McKee, a senior analyst who covers mobile payments for 451 Research. At the 2015 National Retail Federation Big Show event in New York, Mobile Payments Today spoke to several mPOS providers who mentioned specialty retailers' desire to engage customers as they browsed a storefront rather than at traditional checkout areas. Mobile point of sales (mPOS) growth continues to accelerate as the technology expands and deepens its reach across vertical industries, merchants tiers and other geographies. Not to mention, rapid growth will be most evident in emerging economies where mPOS is playing a critical role in building electronic payments acceptance networks against a backdrop of rising card penetration. Both 451 Research and Transparency Market Research are expecting the Asia-Pacific region to become the largest mPOS market by 2020. The current dependence on cash-on-delivery for e-commerce transactions should also open the door for more mPOS development as credit and debit card penetration grows in India, exponentially.

So where does that leave Square, Inc. (NYSE:SQ), you ask? Well Square's payments business, which accounts for almost all the company's revenues reported stronger-than-expected growth in Q1 2016 with revenues of $299m, which is up 45% from the previous year. Not to mention, Sarah Friar, chief financial officer at Square, says the company's user base had expanded to 2m active users. So with 13 million active users reported across the mPOS space by 451 Research in 2015, 2 million users accounted for by Square alone in 2016 would place the publicly traded company in a commanding lead, owning 15% market share in a fairly new and rising niche. So with that being said, Square continues to prove its dominance in the mPOS space as well by narrowing net losses further during its second quarter in 2016. Square posted a net loss of $27 million in Q2 2016, which is significantly less than the net loss of $97 million in Q1 2016. Square's EBITDA was also +$13 million in Q2 2016, which also exceeds the higher end of the company's projected gross revenue guidance and signals the company turning a profit sooner rather than later.

However, not everything is perfect for Square so far. Mr. Jack Dorsey is still losing $2 for every $1 of hardware sales, as Gil Luria from Wedbush Securities says, "The growth is coming from the wrong places." Luria says, "Lenders are no longer wanting to finance alternative lending." Gil Luria continues on to say "Investors are looking past the fast growth for Square's long-term viability and a lot of people are now hanging their hopes on the lending business, so Square highlighting a challenging credit market is a problem." With hardware sales more than doubling from the fourth quarter to $16 million in Q1 2016, Square still sells its devices at a loss to gain new payment customers. The low-margin payments business is seen as more of an entry point for Square to attract new customers who can be persuaded to purchase additional services. And Square's Chief Financial Officer Sarah Friar clarifies the language about a challenging credit market was included in the Q1 2016 earnings report just to reflect industry conditions. This "challenge" does not represent specific issues unique to Square, she says. Demand is strong for loans from Square customers and Square is said to have added two investors at the end of April that will increase funding for its lending program. Square is trying to shift all customers from advances to loans. Loans give businesses the flexibility to pay back balances more quickly than advances, which deduct payments from transactions until the balance is repaid. "Q1 2016 was a really big quarter for laying a foundation for growth," Friar said, "as Square converts more customers to loans."

So now ask yourself as an investor, how do I play this space? Square's shares jumped late Wednesday afternoon after the digital payments company raised its revenue guidance for 2016. It is truly a spectacle to every investor ready to buy this stock right now, that Square is raising its revenue guidance for 2016 despite the fact that its low-margin payments business is pushing the company in the other direction. The company still loses $2 for every $1 in hardware sales, however it still forecasted adjusted full-year revenue will be between $655 million and $670 million, up from a previous range of $615 million to $635 million. An analyst survey by FactSet had produced a consensus estimate of $642.6 million. For the second quarter 2016, Square reported a loss of 8 cents a share on adjusted revenue of $171 million. Analysts had estimated a loss of 11 cents a share on revenue of $157.8 million. And the mPOS business does not look like it is slowing down at all headed into the next decade for tech.

So just imagine what happens next, once Square can begin shoring up its low-margin business in 2017 and eventually close its margin expense gap within its mPOS business? More individuals and merchants will continue to flock to low monthly maintenance mobile point of sales, as consumer growth in this niche definitely continues on an uptrend. So this stock in my humble opinion is a definite buy right here, ladies and gentlemen. Jack Dorsey got in at the bottom of mPOS and is flying high with Square at least until 2019.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SQ over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.