March 2, 2024


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Bear of the Day: Square (SQ)

4 min read

Square (SQ) is a mad genius-level disruptive technology platform that just launched over 100% in Q2 because so many valuation-focused sell-side analysts and short-sighted hedge funds kept it below $75 for so long.


And as of July 9, the stock just tagged the moon above $133, for over 25% gains this month alone. Apparently (some of) the blind have begun to see.


Meanwhile, UBS and BofA offered downgrades to “Sell” and “Underperform” in May after the company’s latest quarterly report when shares had just gotten back above $70.


And I think yesterday, a Cowen analyst made a much more timely downgrade after SQ’s “200% rally” from the Coronavirus Crash lows. Lowering their rating to Market Perform from Outperform, they also thought they should raise their price target from $79 to something a little more respectable like $119.


Obviously I have a personal story here.


In the first quarter of 2018, I became a huge Square fan after I fully grasped the ecosystem they were building for small business to get stuff done seamlessly and effortlessly.


Honestly, I may not have noticed but for my wife who was using the Square app for her various farmer’s markets and craft fairs where she sold everything from home-made goat’s milk soap to fresh crepes made with eggs and veges from our small hobby farm.


We actually had the chance to buy some SQ shares before the IPO in late 2015 — another genius idea from Jack Dorsey to give customers the first crack at shares near $10 — and we sold them for pocket change as the stock did little in 2016.


So I get the first “Stupid Award” for not grasping the potential of this evolving fintech ecosystem.


But in early 2018, I told my TAZR Trader group that “this Square thing” was a potential FinTech revolution to be reckoned with, especially as Blockchain/Bitcoin mania was in the air.


We were buyers of SQ in the $42-45 range and I thought we could set-it-and-forget-it for a double in the next 2 years.


And still, most analysts didn’t see or care about Square’s disruption potential. Unfortunately, I listened to them and sold our shares for small gains of 20% or less.


Then, of course, SQ went to $100 in mid 2018.


So, I also get the second “Stupid Award” as I missed the first SQ kiss of $100.


But I attempted to redeem my ways in early 2019 with this call…


Square is the Apple of FinTech


By this comparison, I wasn’t implying that the Square credit card swiping device was going to rival the iPhone in terms of sales. The idea was more about getting people into the ecosystem where they would likely never leave because built-in accounting software, cash-flow and sales tools, and friendly loans based on your growth were just what the small business person always needed. 


And I was emboldened in this view by two voices. The first was the stand-out bull on Square, Dan Dolev of Nomura Instinet.


Dolev was tracking downloads of payments apps to compare growth between Square’s Cash App and PayPal‘s (PYPL) Venmo. In January of 2019, he found that the gap between downloads grew to 4.2 million, favoring Cash App. 


His data showed that Square’s Cash App had 45.3 million cumulative downloads, topping 41.2 million for Venmo. Dolev then modeled his expectations that the current revenue of $3 per user would continue to expand and projected that the Cash App could contribute nearly $100 million in adjusted revenue for Square by 2020. At the time, he reiterated his $110 price target on Square.


Made sense to me. But the second voice didn’t just make sense — it was golden enough to make headlines. Here was my report on February 26, 2019…


Square On Deck, and on Jamie’s Mind


SQ reports Wednesday after the close if you are not ready to face the prospect of slowing growth, you should exit beforehand.


I’ll be riding into the unknown to see if they keep delivering and the stock breaks out above $80.


Someone else wishes he were riding the disruptive wave of “FinTech” too.


And that would be one CEO of a little bank called JPMorgan.


Here was the excellent story today in American Banker…


JPMorgan’s Dimon: Square innovated where we should have


By Andy Peters

February 26 2019, 4:54pm EST


Jamie Dimon confessed on Tuesday to having a little bit of Square envy.


During JPMorgan Chase’s yearly investor day in New York, the bank’s chairman and CEO was asked what companies could get steamrolled by his bank, which has emerged as a financial-services disruptor. JPMorgan is investing billions of dollars per year in technology and recently rolled out its own online-only bank, dubbed Finn, and is set to become the first U.S. bank to launch its cryptocurrency.


But rather than answer that question directly, Dimon responded by praising a company, Square, that has done things he wishes JPMorgan Chase had done.


“They came up with this little dongle to process stuff and it was a great idea,” Dimon said.


Square then built off the success of its card-reader to provide other services to its business customers, such as wider variety of point-of-sale systems that allow merchants to accept cash or card payments. It also provides merchants with tablets and software that allows them to track sales patterns, inventory and other important data.


“We didn’t give them that opportunity, Square did,” Dimon said.


Finally, Dimon lamented that Square beat JPMorgan to the punch in making online loans to small businesses.


Square Capital, its online lending arm, began offering business loans in early 2014 — nearly two years before JPMorgan began making its own digital small-business loans via a partnership with fintech lender OnDeck Capital.


Square “said, ‘you know what, since we know this company and they might need an advance this time of the year, we might advance them $10,000 or $15,000 or $100,000,’” Dimon said. “They did all this stuff we could have done that we didn’t do.”


(end of excerpt from American Banker article by Andy Peters)


Click the article link above to find out more about what’s on Jamie’s mind concerning a “$40 trillion investments market.”


Fear That “Anyone Can Copy Square”


As clear as Dimon’s confession sounded, very few were truly listening between the lines. They must have thought he meant “Oh sure, Square got there first. But we’ll catch up.”


But I think what his admission really meant was “This thing is going to be a monster at attracting and keeping new small business!”


Here was typical analyst call that I profiled in May of 2019…


Some say the Square has hit peak growth. The team at SunTrust, for instance…


Square price target lowered to $65 from $75 at SunTrust: Analyst Andrew Jeffrey lowered his price target on Square to $65 to reflect its below-consensus Q2 guidance, saying that while he is positive on the company’s above-average organic revenue and EBITDA growth, a “significant deceleration” may be coming. The analyst cites “robust competition in new vertical markets” that will demand Square to boost its investment levels on a structural basis and also warns that margin growth may slow as the company goes after larger retailer customers. Jeffrey kept his Hold rating on Square.


And in a special report I wrote for my TAZR group titled “The Apple of FinTech” on 5/2/19 — the day after what appeared to be another disappointing quarterly report and growth outlook — I looked at all the worries about competition from established payments giants who were busy getting bigger with M&A…


BTIG analyst Mark Palmer reiterated his “Sell” recommendation on Square this week, and other investors apparently agree as shares are down nearly 10% again. He believes that Square faces tougher competition as it vies for larger customers.


Palmer points to the company’s challenges in growing its total addressable market. Its initial market of “micro-merchants” is limited he thinks, so as it seeks to increase its customer base by appealing to larger sellers, Square naturally faces more competition.


That’s shown up in Square’s Q1 gross payment volume (GPV), which fell short of Palmer’s estimate, and weaker-than-expected Q2 adjusted EPS guidance.


“We believe SQ’s GPV deceleration and its unusual quarterly guidance miss may indicate that competition among larger merchants may be becoming more of a headwind for the company,” the analyst told investors in research note. He specifically pointed to competition from First Data, PayPal and Shopify, as well as big banks.


Now, I’ll admit I was emboldened when Jamie Dimon openly revealed his admiration and envy for the Square model and accomplishments in February at their Investor Day. I thought his comments knighted the brand as doing what no one else was doing. Not First Data, not PayPal — and if Shopify wants to build their own FinTech for their merchants, it would be hard pressed to have the capabilities of Square.


I didn’t believe he granted Square an impenetrable moat. But he recognized how quickly the company evolved beyond a mere disruptive piece of hardware and software to an entire ecosystem of small business-friendly tools and services.


Apparently, according to some analysts, the competition can race in now that the field has been plowed. But I have long believed that Square’s brand and vision would capture most of that new business.


And if Jack Dorsey’s people aren’t talking to Amazon, Ebay, Shopify, Instagram and Etsy about making their merchants lives easier, I would be very surprised.


That was the big vision… that Square could become a new type of bank that captured the loyalty of the small business person with personalization, transparency, and FinTech power tools.


Even in light of the big FinTech mega-mergers we’ve discussed here, I thought that any of these nameless, faceless old-line payment processors would want and need the Square brand to put a human face on their FinTech.


Our old-line TSYS (TSS) is trying to adapt to the new world of mobile, on-demand, seamless transactions and that’s why we own it.


But how many small business owners “get” and intuitively trust the TSYS brand before the Square brand?


And there is a whole other broader market of small to medium-sized banks that is being ignored too. Here’s how to understand and lick that scoop of ice cream…


This year we had two big deals in the behind-the-scenes players who provide technology for banking/payments:


FISV for FDC at $22 Billion


FIS for WP at $43 Billion


This M&A fever is why I bought TSS recently. And why we continue to own SQ. But on April 11, WSJ did a story about how the little guys who depend on these services aren’t getting the attention they may deserve…


Frustrated by the Tech Industry, Small Banks Start to Rebel


According to WSJ writers Telis Demos and Rachel Louise Ensign, “Community lenders say their tech providers aren’t always helping them compete.” They looked at the retail banking industry undergoing another major shift, and discovered that high-tech sophistication was only for big urban banks.


So there’s another layer of fintech that Square can enter — serving small banks that may or may not already have a relationship with small business customers who would definitely prefer to be Square users.


Doesn’t this still sound like it’s Square’s game to lose because none of the players see the opportunity quite the way Jack did? With the right technology, business-owner focus, and branding, he almost created needs his customers didn’t know they had!


So Why is SQ So High and Its Zacks Rank So Low?


The bull market came back with a vengeance after the Coronavirus Crash. And the one dominating theme was that software was even more important than most investors realized.


What’s still so amazing (and frustrating) about the stock market “voting machine” is that babies were getting thrown out with the bath water in March, only to reverse and triple in price in Q2.


From one irrational, emotional extreme to the next, in just a few months. From “Get me out!” to “I’m missing out!”


Here was one such analyst catalyst on Monday from one of last year’s doubters…


SunTrust analyst Andrew Jeffrey raised the firm’s price target on Square to $150 from $83, citing that the company is positioned to capture “meaningful” direct deposit market share from banks, adding that the pandemic stimulus funds highlight the functionality of Square’s Cash App which can ultimately “supplant” traditional checking accounts. Jeffrey also spoke of Square’s Seller ecosystem that can create a “network effect,” accelerating the adoption of Cash App and boosting the company’s user retention.


So should you take some profits on Square up here?


According to the Zacks Rank, it wouldn’t be a bad move. The reason SQ is in the cellar of the universe of over 4,000 stocks tracked by the Zacks Rank is because EPS estimates fell pretty hard recently. 


Coming into Q2, and before the company’s Q1 report on May 6, the Zacks consensus bottom line was calling for EPS of $0.70. But that got slashed to just $0.14, for an 83% drop in projected profits this year.


As estimates stabilize and the downward revisions roll out of the 60-day calculation window, SQ will crawl back out of the cellar of the Zacks Rank.


I don’t think Square is an M&A target anymore at over a $55 billion market cap. That’s already priced-in now.


But it remains a force in FinTech and I expect Jack & Co. to keep surprising the competition (and Wall Street) with disruptive innovation.


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