Square: Serves A Huge Untapped Market And Attractively Priced

Nov. 18, 2015 1:38 PM ETSQ, FISV
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IPOs, Value

Contributor Since 2013

Analyzing IPOs, stocks, industries since 2003. Mostly gives pre/post listing reviews on fundamentally strong IPOs, mid to large cap companies.

Square (SQ) is offering 27,000,000 shares of its Class A common stock in the price range of $11.00 and $13.00 per share. At the mid-point of the price range the company is demanding a market capitalization of about $3.87 billion (considering 322,944,713 shares outstanding after the offering).


Square provides payment processing (point-of-sale), financial, and marketing services to business of all sizes. It allows businesses to accept card payment via mobile devices, get financial assistance in a quick time, and interact with customers in a better way. The company is a fast emerging player in the US card payment processing market. Though the company also has a significance presence in Japan and Canada, but the company generates most of its revenue as a card payment processor of the US market. The company's software app and hardware can convert a mobile device to POS system, which is capable of accepting payments via EMV chip cards and mobile wallets. Its solutions also supports technologies like NFC (connects wirelessly to mobile devices).

In the 12 months ended September 30, 2015, sellers using Square processed $32.4 billion of GPV, which was generated by 638 million card payments from approximately 180 million payment cards

Revenue source:

Currently, the company generates approximately 95% of its revenue from payments and point-of-sale ("POS") services. The company earns revenue whenever a business accepts a payment using Square. The company normally charges 2.75% of the total transaction amount for processing card-present transactions, and 3.5% of the total transaction amount plus $0.15 per transaction for card-not-present transactions. The company also selectively offer custom pricing for larger customers.

Growth so far:

The company is in the business since 2009 and has shown rapid growth during the last few years. Gross payment volume, or GPV, (the amount of gross payments processed by sellers) using Square has grown from $6.5 billion in 2012 to $23.8 billion in 2014.

Powered by the growth in GPV, the company's adjusted revenue grew from $203.5 million in FY 2012 to $850 million in FY 2014, representing a cumulative annual growth of ("CAGR") of over 100%. For the nine months ended September 30, 2015, The company's total net revenue grew to $892.8 million, up 49% from the nine months ended September 30, 2014. However, to achieve such a high growth, the company spend heavily on product development and marketing, which makes the company a loss making entity.

The thing that makes the company's growth during the recent years more remarkable is the fact that the company's revenue growth-rate exceeds the U.S. credit card purchase volumes growth-rate by over ten times. The U.S. credit card purchase volumes grew by under ten percent from 2013 to 2014.

Innovative approach:

The key reason behind the exceptional growth of the company is the company's innovative approach towards the business. Since the beginning, the company has been creating market for itself by offering its products to businesses that do not have access to card acceptance solutions due to various reasons like small size, complex requirements, and lack of awareness. The company offers its solutions cost-effectively and quickly. Its clients can accept card payments in less than five minutes by using a free software app along with affordable (often free) hardware. This approach allowed the company to grow its customer-base quickly, without facing much competition. Today, the company serves over two million customers, which reflects the success of the company's approach.

Costumer base:

The company serves diverse set of industries, including food, services, retail, and leisure. The chart below shows the percentage mix of the company's GPV by seller industry.

Services expansion:

The company has been expanding its service offering quickly. The company started its business as a payment processor and later expands its offerings to include financial, business management and marketing services. The company also has started offering sector specific services like Caviar, which is a food delivery service to help restaurants.

Every new service that the company offers targets its existing customer-base. This allows the company to gain additional revenues from its existing customers. This not only allows the company to save on marketing costs but also allows the company to win customers' loyalty.

Huge untapped market:

From the very beginning, the company has been targeting small businesses for its growth. Even though the company serves over two million small businesses, there still is a huge untapped market. According to reports*, out of the total of 30 million businesses in the US more than 20 million do not accept credit cards. This situation leaves a huge growth opportunity for the company to tap in the future.

*Source: The company's prospectus

Key risk:

  • Financial:

As discussed earlier, the company provides financial assistance (Square Capital) to its clients. The company offers funds to pre-qualified customers (based on their payment processing history). The company has already advanced over $300 million across over 50,000 advances since launch of the service in May 2014. On one side this service holds a huge growth opportunity, but on other side the service holds significant financial risk. So far, the company has mitigated significant amount of such financial risk by arranging such funds from third parties that commit to purchase the future receivables related to these advances.

  • Loss making entity:

The company is loss making entity as it is spending heavily to increase its customer-base. On the positive side, the company's loss has been coming down as percentage to the revenue. For the nine months ended September 2015, the company's net loss as percentage to the revenue stood at about 15%, which is the lowest since 2012. The reduction in loss (in percentage term) reflects that the company's focus on increasing its customer-base is bringing in the economics of scale and will be positive for the company in the future.


At the mid-point of the price range, the company is available at price-to-sales ratio of 3.22 (trailing twelve months).


Square has shown a rapid growth in the recent times, and it is highly expected that the company will continue to grow at a rapid pace in the near future because the company is addressing largely untapped market where Square already has become a significant brand. Moreover, the company has created and is still creating a portfolio of services that will allow the company to monetize its costumer-base in a much better and profitable way. Considering the growth oriented nature of the company, its valuation looks attractive.

Disclaimer: Investments in the stock markets carry significant risk, stock prices can go up or down without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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