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Square Stock Will Ride Small Business to Big Gains (SQ)

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Square Inc ( NYSE:SQ ) has struggled mightily in 2016, trading down 11% through the first nine months of the year, and off nearly 30% from its April 2016 highs. But investors' exodus from Square stock - as it faces increasing competition in the financial sector - might be coming to an end thanks to recent moves.

3 Reasons Square Inc (SQ) Stock Is Prime Buyout Bait

Source: Chris Harrison via Flickr (Modified)

Specifically, SQ is investing heavily to boost its market share in business loans, and is pushing further into international small-business payments.

Square recently announced a partnership with TouchBistro and Vend , two leaders in the point-of-sale market. The deal allows Vend and TouchBistro sellers to use Square hardware and services. Vend is offered in more than 15,000 stores in 140 countries. TouchBistro has customers in 35 countries.

While this obviously benefits the small businesses who now gain access to SQ's tools, investors should look at the continued opportunity for Square stock as well.

SQ gains another large pool of potential customers through these partnerships. Square will allow these new customers the ability to accept chip cards and mobile wallets, deposit money instantly and use analytics to see sales trends.

More importantly, Square will give these businesses the ability to take out loans against future sales , strengthening a growing business for Square.

The Growing Bull Case for Square Stock

Square stock should start to become valued based on its growing small-business loan segment versus the smaller-margin fee processing service. Earlier this year, SQ teamed up with Upserve to make loans available to restaurants across the nation. Square gained access to more than 7,000 restaurants through this partnership. Upserve has annual transaction volume of $8 billion and adds more than 200 new restaurants a month.

Square continues to post impressive numbers from its business loan segment, and that's what makes SQ stock so undervalued here.

In the latest quarter , Square loaned out $189 million to businesses - an increase of 123% from the previous year and an increase of 23% from the prior quarter.

This growth in small business loans is helping differentiate Square versus rivals and also helping the company move into a higher-margin growth area. Square added multiple new investors in the quarter, which act as third parties on business loans. SQ collects a flat 14% on loans it makes, no matter the size of the loan. The company's flat-fee structure is helping it win over customers and also acts as a great service for Square stock.

Plus, compare that 14% fee to the 2.7% that Square makes on most of its processed transactions.

While the mass volume is in the transactions, you can quickly see why the loans and the new partnerships matter so much. Square offered 34,000 business loans in the last quarter. Each loan takes an average of nine months to be repaid, as Square collects a percentage of daily transactions to recoup its loaned money.

Most see the loans as a win-win. Square collects a nice flat fee and is able to gain more customers through the service. Small businesses are able to get loans quicker and for larger amounts based on their past and future sales.

SQ Looks Overseas

Along with small business loans, international expansion is an area that could be overlooked by Square shareholders.

SQ investors should be excited to see the company's push of a new product in Australia . Square is using Australia as its first country outside of the U.S. to launch its newest contactless card reader. This move is aimed at increasing Square's share in the small- and midsize-business markets.

Australia is the perfect place for Square to push this device and expand its share. Around 80% of Visa Inc (NYSE: V ) and MasterCard Inc (NYSE: MA ) transactions in the country are done with contactless cards.

Square continues to push its presence in contactless payment solutions elsewhere, too. In March, Square launched an earlier version of this device, which allows users to use tap and go cards or mobile wallets, like Apple Inc.'s ( NASDAQ:AAPL ) Apple Pay and Alphabet Inc's ( NASDAQ:GOOG , NASDAQ:GOOGL ) Android Pay. Square collects a 1.9% transaction fee on the swipes.

The payment markets are continually changing, but Square is not sitting idly by. Square was one of the first to get into increased payment solutions for small businesses. With the push by the company to offer small-business loans and increase its operating margins, Square stock now looks stronger for the long-term.

The fears of competition against Square might be overblown. SQ stock looks enticing under $12.

As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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