Why I will never sell my Square share
Most of us, investors and others, have had mentors who have told us at one time or another to “never say never”. While this adage could also apply to investing in stocks, I think an exception should be made for Square (NYSE: SQ).
Despite its name, this financial services and mobile payments specialist is anything but boring or conventional. The way the company disrupts finance, investors could snatch the winnings in this fintech stocks for the coming years. Let’s look at three reasons why.
1. The (more) cashless society
Indeed, many investors want to profit from the so called “cashless society”. They base this on the perception that physical currency is going to disappear.
Despite my optimism about the Square share, I wouldn’t go so far as to say so. However, cash has important limits, which most Square products help overcome. People have turned to these options in increasing numbers.
This is especially true for Square’s Cash app. It allows users to split their payments, banking, and even stock or bitcoins purchases on the app.
The success of the Cash App is still exceed management expectations. In the third quarter, Cash App delivered a gross margin growth of 212% compared to the previous year. By June, usage had grown to over 30 million monthly active users.
2. The Square ecosystem
Additionally, beyond the versatility of Cash App, Square has built a complete financial ecosystem.
In the previous century, finance companies did not venture into multiple financial transactions. We could have turned to a Bank of America for personal banking services and a mortgage. A company like Charles Schwab would have managed the stock trading. For those who owned a business, a business like ADP could have managed the payroll. This business may also have collected money from a cash register made by RCN.
Square can perform all of these functions within a single ecosystem. This has led to fundamental changes in the public’s relationship with the financial sector.
Due to these changes, people may decide that they just need the Cash App and will close their bank and brokerage accounts. Businesses could also ditch payroll and cash management companies in the same way.
Therefore, Square could turn its detractors in circles. Because of this one-stop-shop for all things money, some may ask the company to “take care of the finances”. While I stop before I make this prediction, such a belief could cement Square’s place in the fintech industry.
3. Square stock status
More importantly for investors, such a perception will inevitably help Square action. Indeed, its performance has already generated massive shareholder value. Its share price has risen nearly 250% since the start of the year.
With this level of growth, few would describe it as “cheap stock”. Nevertheless, it is not as expensive as it looks.
Indeed, a forward P / E ratio of 175 seems expensive. After all, diluted earnings per share only grew about 17% year-over-year in the last quarter. This may not seem high enough to support such an assessment.
However, revenue jumped almost 140%, in part thanks to an 11-fold increase in bitcoin revenue. Bitcoin revenue comes with very slim profit margins.
Yet most of the increased profits came from transaction and subscription income. Square invested most of that profit increase in the business. This move should lead to higher returns for shareholders over the long term.
In addition, its price / sales (P / S) ratio is only around 13. This compares well to its rival, Pay Pal. Also, its P / S ratio is about a third of what some have called the “Brazilian square”, StoneCo.
The bottom line
No matter what happens with stocks in the short term, Square continues to change the way people and businesses interact with money.
Through the Cash app, it connects individuals to the cashless society. Additionally, with the Square ecosystem, more customers could abandon bank accounts and other financial products that were once considered essential.
The company’s successes have taken the action to new heights. Investors who buy Square and buy it are likely to see the shape of their equity portfolios continue to improve.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.