Square Is A Fast Growing Company In A Great Industry

In this vein, this month we'll profile just such a company - Square (SQ). Not only does Square fall into the smaller, higher growth end of the payment processing space, but the stock has also taken a 25% haircut over the past month, making it more enticing than ever. Is it a good buy right now? Let's see...

The Flea Market Payment Processor

Square started life by providing a rather clever solution for traditionally cash-or-check only businesses to accept credit card payments.

Basically, Square built a simple card reader device that plugs right into the merchant's smartphone or tablet device. Combine this with a matching app (the software side) and, voila, the merchant instantly had a point-of-sale terminal. Square merrily took about 3% of each transaction, along with some money for the hardware and onboarding fees.

The company has since built out its offering into adjacent categories. Square now offers additional software for inventory management, payroll processing, invoicing, gift card management, and order management. It also has a business lending arm (Square Capital), and a restaurant delivery service (Caviar). Additionally, it has tailored its point-of-sale software for specific industry categories, such as restaurants, retail, and appointment-based service businesses. Square offers many of these add-on features as cloud-delivered software-as-a-service (SaaS), which customers subscribe to and pay for on a recurring basis.

Perhaps even more important is that Square as been able to sell its payment and software services to ever larger customers. At the end of last year, customers with over $500K of gross payment volume accounted for 20% of customers, up from 9% just a few years earlier. This is a big deal, as larger customers tend to be stickier and less likely to go out of business, be acquired, or try something else.

In all, transaction fees still account for the vast majority - about 80% - of revenues. Subscription fees account for 16% of sales, while the rest (hardware and bitcoin) make up the remaining 4%. It should be noted, though, that subscription fees are the fastest growing. Just three years ago they were only 5% of sales.

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