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Square Inc (NYSE:SQ) is one of the most under-the-radar stocks on Wall Street right now. Despite the fact SQ stock has doubled over the past 12 months, it continues to cede headline space to the likes of other high-flying tech stocks like Advanced Micro Devices, Inc. (NASDAQ:AMD) and Nvidia Corporation (NASDAQ:NVDA).
That’s OK. There’s nothing wrong with profiting quietly.
Square’s most recent quarterly earnings highlighted what is going well for the payment processing company, while also helping to shine light on what will move Square ahead and SQ stock higher in the future.
A Quick Look Back at Square’s Earnings
Square reported gross payment revenue of $13.6 billion, a 33% increase from the same quarter a year ago. Net revenue hit $462 million, representing a 22% improvement year-over-year, and a beat of Wall Street’s expectations for $450 million.
The strong revenue figure still dripped down to a 4-cent-per-share loss for the quarter, but that was half the loss analysts were estimating.
Management also increased full-year guidance for both revenue and earnings per share.
Square recently noted that it currently captures less than 3% of the $26 billion annual U.S. payment market. So while this most recent quarter indicated that SQ is growing sales, the company isn’t exactly hitting a ceiling. If it can keep that top line growing, profitability might not be too far off.
One potential opportunity for Square is overseas.
The company recently began operating in the U.K., where 70% of shoppers prefer to use credit cards. What’s interesting, though, is that only half of the country’s small businesses currently accept cards. That’s the kind of market opportunity Square can move into, bringing Britain’s small businesses in line with the times.
Also, Square’s platform, device and ability to process transactions with nothing more than a cell phone make it appealing to developing countries where landline infrastructure isn’t nearly as prominent.
The idea that a remote business in Africa, India or South America could have the ability to efficiently and securely process credit card transactions with nothing more than a cell-phone gives Square the ability to not only expand globally, but perhaps be even more important to third-world economies than it is in the U.S. or other developed nations.
While Square may have started off as the payment processor for the ultra-small, individual retailers, Square is focusing more on getting larger clients. The company now boasts that 43% of its merchants process more than $125,000 in annualized revenue.
These larger merchants are not only more revenue for Square, but they are higher-margin clients. Square’s profit margins as a percentage of payment volume will likely begin to get much better than its recent 1.07%, which was up from 1.03% last year.
Bottom Line on SQ Stock
Again, hearkening back to Square’s most recent quarterly earnings: The company is on the verge of becoming profitable, and it only operates in four countries around the world. The potential market opportunity is massive — something that investors seem to forget when they begin fretting about the competition.
While PayPal Holdings Inc (NASDAQ:PYPL), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) all have somewhat competing technologies, no one is taking a commanding lead despite years of improvements and bolstered marketing.
Let me leave you with one last thought: According to some estimates, worldwide credit card volume is expected to hit $45 trillion a year by 2025. If Square can be responsible for just 1% of that amount ($450 billion), the company would be processing 10 times more than its current payment volume.
Even if it can’t increase its margins, 1.07% of $450 billion is still $4.8 billion in profit.
SQ stock doesn’t even begin to price in most of that potential, even at today’s all-time highs. So even though it’s rarely a good idea to chase stocks at such heights, Square is a reasonable exception.
As of this writing, Matt Thalman was long AAPL, GOOGL, PYPL and SQ. Follow him on Twitter at @mthalman5513.