Morningstar | We Like Square, but Not as Much as the Market Does
We think Square’s business model, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square's success has largely come from expanding the acquiring market, as opposed to stealing material share from existing players.To develop sufficient scale, Square must move past its micro merchant base, and recent results suggest it is doing just that. At this point, slightly more than half of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past couple of years, while absolute growth in merchants below this threshold has largely held steady. Additionally, the company is making significant progress in cross-selling ancillary services, such Instant Deposit and Caviar, into its merchant client base. We think the move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model. But we see Square as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its 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-take-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 more attractive opportunities in the core business.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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