Morningstar | We Like Square, but Not as Much as the Market
We think Square’s unique business model allows the company to reach and retain micro merchants that are not viable for other acquirers. Further, recent results suggest it is having considerable success making a necessary move upstream. We think this, combined with a recent burst in the growth of ancillary services, will allow Square to scale up and achieve solid margins over time. As a result, we have upgraded our moat rating to narrow from none. But we see the company as a niche operator, as opposed to a disruptor, with long-term margins constrained by Square's relative lack of scale. We think the company's most value-creative long-term opportunity lies in expanding internationally, as opposed to displacing leading domestic acquirers. The company's effort to build out a consumer business surrounding its Cash App creates some option value. However, this business looks like a long shot to us, as Square is competing in a space with winner-takes-all dynamics, and its competitors have a sizable lead in users and large consumer customer bases. Further, we have concerns that Cash App could ultimately be a distraction from opportunities within the core business, especially given that management has been thinned following the recent departure of CFO Sarah Friar. While some investors might see the recent pullback in the share price as an opportunity to get in on a business that should grow its top line by almost 50% in 2018, we think Square's shares are still roughly 50% overvalued. We see better value among the more traditional acquirers, as the recent market pullback has created the opportunity to purchase peers Global Payments and Worldpay, companies with high ROICs and a clear path to double-digit earnings growth, at a forward P/E ratio of less than 20 times.For more details, please see our Select presentation, “We Like Square, but Not as Much as the Market.â€
Square is a commerce ecosystem that combines software with hardware to enable sellers to turn mobile devices and computing devices into payment and point-of-sale solutions. With the company's offering, a seller can accept payments via magnetic stripe, Europay, MasterCard, and Visa, or Near Field Communication; or online via Square Invoices, Square Virtual Terminal, or the seller's website or app. Also, sellers can gain access to reporting and analytics, next-day settlements, digital receipts, payment dispute and chargeback management, security, and Payment Card Industry compliance. The company's Cash App enable individuals to send and receive money electronically to and from individuals and businesses.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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