Square Continues Growth and Domination of Modern POS

As Square (NYSE: SQ) continues to grow through the end of 2016, we are expecting them to beat their guidance. In this post I want to focus on Square's smaller parts of their business, Hardware, SDP (Software data products), and Square Capital. 

Hardware

Square's key feature from the get-go was dead simple hardware. This fall, Apple is going to (widely reported) shake things up and delete the headphone jack. We are expecting Square to develop a multi port card/chip reader for next gen ports (non-headphone: Apple lighting, USB-C). These devices should bring in significant revenue as consumers need new devices to continue processing revenue. While revenue should rise significantly, we aren't expecting the increase hardware revenue to translate to an increase profit from the sales.  

Square's continuous POS Dominance 

Square continues to dominate competitors in its POS segment in search queries

Square Capital

Square has continued to grow their merchant loan business in 2016 and we expect growth to continue for the rest of the year and into 2017. CFO Sarah Friar has expressed interest in continuing to grow this segment and possible (through merchant partnerships) expanding this business outside of existing merchants, we view this as something that is extremely positive for the company. One of the first partnerships is Square Capital's partnership with Upserve. 

SDP

Square's Software and Data Products (SDP) is perhaps Square's most exciting source for future growth. Their product offerings have grown from simply faster deposits to appointments, payroll and employee management, customer engagement, and food delivery software. While Caviar, Square's food delivery service, has been far from successful, Square's other SDPs have seen wild success and are contributing to Square's bottom line growth.

Additionally, SDP's carry very high margins (resting around 65%) in addition to their growth. We see Square's SDPs as a key catalyst towards Square's future value by both contributing to the bottom line and producing customer loyalty synergies by improving the Square customer ecosystem. 

POS Growth and Positioning

Square continues to grow their key revenue segment with POS sales. With one of the simplest, innovative, and advanced POS systems in the world, Square has been able to continue their market share growth. In addition to Square's continued market share growth, they have been able to add value to their customer's business through both their customer friendly POS system and SDPs. Square's share of large merchant customers has grown consistently with now over 43% of Square's GPV consisting of merchants over $125k in annual processing (up from 37% last year).

The World's Best Management Team

Square has one of the most undervalued management team starting with Square's CEO Jack Dorsey and CFO Sarah Frier. While Dorsey has been burdened with his other company, Twitter, struggling he has been able to guide Square to greater success. Through the team's leadership they have avoided harmful partnerships, Starbucks, and moved towards more beneficial smarter partnerships, such as Blue Bottle Coffee. New partnerships with Vend and Touchbistro still need to prove themselves, but we expect them to go quite well. 

CFO Sarah Frier has been able to manage Square's costs and lead the company to EBITDA profitability, while continuing double digit YoY growth. Without a doubt Sarah Frier is one of the most impressive members of the executive team at Square. Of course, the rest of the management team is top notch and has played pivotal roles in moving the company forward.

Conclusion

We believe that Square is postponed to continue to grow both revenue and margins as they head into the end of Q4 and 2017. The potential in Square Capital and their SDPs is so great that we are raising our price target and outlook for the company. 

New Price Target: $25

Outperform