Payments processor Square (NYSE:SQ) made its public market debut last month. Although the firm's stock surged on its first day of trading, shares have fallen nearly 10% since then. The company isn't profitable, and it faces questions about its leadership, but it still holds promise for more adventurous investors.
1. It's growing rapidly
Square's business is booming. In the first six months of the year, its revenue rose more than 30% on an annual basis. Taking out the revenue related to its Starbucks partnership (which is set to expire next year) and the transaction fees it pays to banks and credit cards, it rose nearly 67%. Transaction revenue (the amount of money Square generates from processing transactions) excluding Starbucks rose 52% on an annual basis. In total, Square's Gross Payment Volume (GPV) -- the amount of money Square processes -- rose 53% (again, excluding Starbucks). Most of this growth came from new sellers added between June 30, 2014, and June 30, 2015.
During those 12 months, just over 2 million sellers accepted five or more payments using Square, giving investors some idea of the total number of active merchants. By that metric, Square's market penetration is relatively low, as there are around 30 million small businesses in the U.S., and about two-thirds of them do not currently accept credit cards. Square argues that its total addressable market could be even higher, as individual freelancers, contractors, and others that do not show up in government data could also eventually rely on Square. In general, credit cards continue to edge out other forms of payments (such as cash or check).
2. It has almost no international business -- yet
Square's rapid growth could continue and its addressable market could expand if it can successfully transition outside of the markets where it currently competes. Right now, Square is limited to the U.S., Japan, and Canada. Even then, the U.S. generates almost all (nearly 97%) of Square's revenue.
Square intends to grow its international businesses, and eventually enter new markets. Obviously there are risks to global expansion, but Square's business model should be equally appealing to foreign merchants, giving it ample opportunity for additional growth.
3. Strong brand recognition and relationships could translate into additional services
Square's most compelling long-term opportunity may lie in its ability to construct a platform of services around the small businesses that rely on it for credit card processing. About half of Square's sellers find the service themselves -- either organically, or through word-of-mouth -- suggesting that the company presents a compelling value proposition for small business owners.
Square has already introduced a number of services designed for small businesses, most notably Square Capital (which provides financing to small businesses), and Square Customer Engagement (a software suite that provides customer tracking, marketing, and feedback, among other services). Last year, it acquired Caviar, a food delivery start-up. Square faces competition in all three spaces, but its relationships with small businesses and the ample amounts of data it has on transactions give it an advantage. Square also plans to introduce more services over time.
Larger merchants appear to be increasingly trusting of Square. In the second quarter of 2012, just 2% of Square's total sellers generated annual GPV in excess of $500,000, and a full 92% were under $125,000. Today, those percentages stand at 11% and 63%, respectively.
Overall, Square's rapid growth and its seeming capacity for additional growth make it attractive for those who can tolerate owning a company that's losing money.