What Value does Square Inc. (SQ) have?

Square Inc. (SQ) could show us the potential value of Stripe’s possible initial public offering (IPO).

To explain, both companies are payment processors. The difference between the two is that Square Inc. (NYSE: SQ) is primarily a hardware company and Stripe is a software company.

In particular, Square sells point-of-sale (POS) systems that allow merchants to accept credit and debit card payments. On the other hand, Stripe sells payment interfaces; applications that allow organizations to accept payment online or in apps.

Both Stripe and Square Inc. (SQ) have huge platforms

Therefore, both companies operate massive payment platforms. For instance, Stripe’s customers include over 700,000 Lyft drivers who have a Stripe interface inside their Lyft App.

Meanwhile Square had 225,000 active invoice sellers and seven million users of the Square Cash App in 2017, Expanded Ramblings estimates. In addition, there were about two million Square Sellers in 2017.

Interestingly, Square and Stripe are moving closer together. For instance, both companies are major players in mobile commerce. In particular, Stripe offers software development kits (SDKs) for iOS and Android, the world’s two most popular mobile operating systems.

Moreover, Stripe offers platform payments in 25 countries. In detail, platforms using Stripe include Shopify, Twitter, Medium, Facebook, Pinterest, and Kickstarter. Hence, Stripe seems to be in a better position to dominate app-based payments.

How valuable will Square Inc. (SQ) and Stripe be?

Stripe could be worth $20 billion, Fortune claims. However, Stripe Chief Operating Officer Claire Hughes Johnson insists her company has no plans for an IPO.

It is easy to why Johnson has no interest in an IPO. In fact, Stripe was able to raise $245 million in private investments from Tiger Global Management in October 2018. Therefore, Stripe can raise all the money it needs without issuing stock.

However, Stripe’s valuation has more than doubled in the past three years. Interestingly, Stripe was worth $9 billion in July 2015, Fortune estimates.

On the other hand, Stripe is far from the world’s most valuable fintech unicorn. Notably, that honor belongs to China’s Ant Financial, the people who bring us Alipay. Specifically, Ant had an estimated value of $150 billion in June 2018.

Is Square (SQ) Inc. Making Money?

Stripe and Ant demonstrate that payments platforms can make a lot of money. However, Stripe’s payment interfaces and Ant’s digital wallets are software.

Meanwhile, Square (SQ) Inc. provides both hardware and software. Importantly, Square’s financials indicate the company is making money.

For instance, Square records a gross profit of $352.66 million on revenues of $882.11 million for 3rd Quarter 2018. However, Square reports an operating loss of -$9.87 million and a net income of $19.64 million for 3rd Quarter 2018.

Additionally, Square achieved an operating cash flow of $47.63 million and a free cash flow of $33.6 million on 30 September 2018. Therefore, Square is generating cash from its payments platform.

Particularly, Square (SQ) Inc. had $765.07 million in cash and equivalents and $522.21 million in short-term investments on 30 September 2018. Thus Square had $1.287 billion in cash at the end of 3rd Quarter 2018.

Square Inc. (SQ) is a cash-rich company with a growing business

Consequently, Square Inc. (SQ) is a cash-rich company with a growing business. In fact, Stockrow calculates Square had a revenue growth rate of 50.75% in 3rd Quarter 2018.

Therefore, I think Square Inc. is a potential value investment because it offers vital infrastructure for the app-based economy. I predict Square could generate large amounts of cash in the future.

Unfortunately, Square Inc. (SQ) is not paying a dividend right now. Moreover, I think Mr. Market overpriced Square at $66.23 a share on 11 January 2018.

Despite that, Square Inc. (SQ) is a good speculative play because they position it to provide fintech services to small businesses. However, Square faces a lot of competition and many threats.

The many Threats to Square Inc. (SQ)

Obviously, the greatest threats to Square Inc. (SQ) are PayPal Holdings (NASDAQ: PYPL), and Stripe. To explain, both payment platforms compete directly against Square on its home turf in the United States.

A growing menace is Alphabet (NASDAQ: GOOGL) which owns Google Pay. Specifically, Alphabet (NASDAQ: GOOG) has received permission to offer a variety of financial services in Ireland and the European Union through Google Payment Ireland. However, details of the services Alphabet plans to offer in Europe are not available.

Cryptocurrency payment solutions like Plutus Tap N’ Pay and Pundi X poise a theoretical threat to Square. In fact, Pundi X is trying to set up 1,000 point-of-sale terminals to connect customers in Colombia to its Ethereum based payment platform.

Meanwhile, Plutus payments are accepted by the Single Euro Payments Area (SEPA). To explain, SEPA is a European Union-wide system for the simplification of bank transfers. Under these circumstances, Pundi X is a threat to Square in developing nations and Plutus is a menace in Europe.

The Chinese Menace to Square Inc. (SQ)

Finally, there are the giant payment Chinese payments platforms; Ant Financial’s Alipay, and WeChat Pay.

For instance, WeChat Pay owned by Tencent Holdings (OTCMKTS: TCEHY), had 600 million users in 2017, Merchant Machine estimates. Meanwhile, Alipay had around 400 million users. In contrast, the largest user payment app, PayPal had 210 million users in 2017.

Thus a major threat to Square is Ant Financial or Tencent offering a point of sale (POS) solution in the United States. Tellingly, Tencent is planning to expand WeChat in the US, CNBC reports

WeChat could spread fast in the United States because it is a Quick Read (QR) code solution. To explain, QR code based wallets like We Chat Pay and Walmart Pay approve payments by reading a bar code generated by a POS device.

Hence, merchants require less equipment to accept QR code payments. More importantly, there is no wireless signal between a phone and a cash register which can create a security threat.

Is Square Inc. (SQ) a Value Investment?

In fact, America’s largest retailer Walmart (NYSE: WMT) accepts QR code wallets but not near field communications (NFC) apps like Apple Pay which use a wireless connection. Under these circumstances, Tencent could quickly build up a huge presence in the US and become one of Square’s biggest and most dangerous competitors.

Despite all the competition, I think Square Inc. (SQ) is a potential value investment because of the widespread need for effective payments solutions. Moreover, I think Square has a lot of room for growth.

Notably, widespread use of solutions like WeChat Pay will create more customers for Square. To explain, more customers will need POS solutions to accept phone-based payments. In particular, many more merchants will need QR code generators that Square could provide.