Square Is A Fast Growing Company In A Great Industry

Big Time Growth

Square is delivering big time growth. In the most recent quarter, revenues grew 48% year-over-year. Even considering the impact of acquisitions, that represents a pretty impressive step up from 30% growth delivered in 2017.

Management believes it has a very large market to address. In the U.S. alone, Square estimates a potential $26 billion dollar market for small/medium business (SMB) payment processing, $14B from Square Capital, $12B from its various subscription software offerings, $11B from Caviar, and $6B from e-commerce software, putting the total addressable somewhere near $65 billion dollars. What's more, they also estimate the international opportunity in the same verticals as more than 5 times that large!

All told, this is a very attractive growth market for a firm that will just cross $3 billion in revenues this year. When compared to competitors like PayPal (PYPL) ($15 billion in revenue) or Visa ($20 billion), Square is just getting started. That makes its growth potential all the more enticing for us as investors.

The Competition and Risks

While payment processing is a great business that mitigates a lot of typical business risks, Square is certainly not without its challenges, both acute and chronic.

Acutely, much of the recent stock price drop was due to the announcement that CFO Sarah Friar is leaving the company at the end of the year to take the CEO spot at Nextdoor. This is a big hit, as Friar is easily the most visible company officer to investors. It is also worth noting that she may be its most important executive, considering CEO Jack Dorsey doubles up as chief executive for Twitter (TWTR) as well. Top level turnover is always reason for pause, and this is no exception.

On a more chronic basis, given that this is a huge potential market, the lineup of competitors is both long and strong. PayPal offers very similar services to Square, with a more robust international footprint, wider vendor acceptance, and stronger e-commerce offerings. Large tech companies, notably Apple (AAPL) and Google (GOOG), have introduced their own payment processing layer services. Countless other SaaS firms are attacking the business software market for inventory, payroll, and order management.

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