Square's (NYSE: SQ) management team gave some key insights into its growth strategy during its second-quarter earnings call. Here are the key takeaways for long-term shareholders.
A need for speed
Speed may be Square's most powerful competitive advantage. By enabling ultrafast payment transactions and instant deposits, it helps its customers easily accept credit cards and quickly gain access to those funds. Thus, Square has positioned itself as a valuable partner when it comes to cash flow management -- a key challenge for many small businesses. In turn, it's enjoying surging growth for its services, with instant deposit volume doubling, to $4 billion, in less than a year.
Automation is allowing Square to scale rapidly
Incredibly, 99.95% of Square's transactions are automated. This allows them to be processed without needing to be evaluated by a human being from a risk management perspective. Square sees its ability to manage risk in a "hyper-automated" manner as an important point of differentiation from its competitors. Time will tell whether these automated solutions work as well from a loss perspective, but for now, they're helping Square rapidly expand its operations.
A powerful ecosystem
This statement helps to explain the power of Square's ecosystem-based business model. Each new service Square introduces reinforces the others. And once Square acquires a new customer, it's typically able to cross-sell additional services to that business. Moreover, each additional service used makes it less likely that business will leave Square's ecosystem, thereby increasing the lifetime value of that customer and the network as a whole.
A big push into restaurants
Square sees a massive opportunity in providing industry-focused solutions to the more than 300,000 restaurants in the U.S. alone. Its Square for Restaurants platform combines hardware, software, and payments services that help restaurants streamline their operations. It also offers the option of integrating with Square's fast-growing Caviar delivery and pickup service. As the only company that provides point-of-sale hardware and software with food pickup and delivery, Square is rapidly gaining share; Caviar revenue more than doubled year over year in the second quarter.
Invest more now, profit more later
With such a massive market opportunity before it, Square is making the smart decision to invest aggressively to expand its operations. It enjoys significant competitive advantages, but legitimate competition does exist, so establishing an early lead is of the utmost importance.
Additionally, Square often sees a rather quick payback period for its investments in areas like sales and marketing, with each dollar it spends to bring a new customer into its ecosystem typically more than paying for itself within a year's time. Therefore, investors should welcome Square's growth investments, as the capital this emerging payments leader spends today is likely to produce far larger profits in the years ahead.
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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short September 2018 $80 calls on Square. The Motley Fool has a disclosure policy.