The primary way investors create long-term wealth in the stock market is by riding trends. I am not talking about price trends but rather the overall societal and technological macro-trends that come together to change the world.
Trillions of dollars have been made by identifying these macro trends and purchasing shares in companies riding them. The trick is identifying companies that are leaders in their niche -- the companies that possess the momentum and fortitude to withstand resistance to change, and are the first movers into the space. These three fundamental factors are what distinguish long-term winners in the stock market.
The trend toward making everything mobile has also led to the development of various sub-trends. One of the most exciting and world changing sub-trends is the move toward decoupling the transfer of money from banks and other traditional financial institutions to upstart technology firms. Companies like PayPal (Nasdaq: PYPL) have led this revolution.
Right now, another revolution in the money transfer space is underway. This revolution, built upon the infrastructure developed for mobile devices, is changing the way merchants accept credit cards. No longer are retailers required to purchase expensive credit card processing equipment and submit to an often rigorous approval process. Today, nearly anyone with a smartphone can accept credit cards. No matter how small or new the business, any merchant with a bank account and smartphone can receive payments via credit card.
Right now a bullish opportunity exists in the leading company in the mobile credit card space Square (NYSE: SQ).
Co-founded by Jack Dorsey, who was also the co- founder and CEO of Twitter (Nasdaq: TWTR), Square's mission is to simplify commerce between buyers and sellers.
The company is part of the huge market of credit card processing. The U.S. card processing market is about $10 trillion in annual size and Square only has around one half of 1% of the pie so far! This is despite the company growing by over 500% in the last several years, according to their investor presentation.
To give you an idea of the massive growth of Square, consider this: Gross payment volume ramped higher by 52% year over year in the second quarter of 2015. The growth continued to accelerate into the second quarter of 2016 with a 42% gain year over year. Adjusted revenue has also kept up the bullish pace with 65% year over year growth in the second quarter of 2015 and 54% in the same quarter 2016. I expect this growth to continue for the next several years.
Square is continually diversifying and innovating within and outside the payment niche. One of the most exciting -- and likely profitable -- recent partnerships is the one with Upserve. Upserve is a restaurant technology company with over 7,000 restaurant clients who use the company's software to manage over 20 million meals per month. Currently, more than 2% of all restaurant sales run on Upserve payments. Square Capital, which provides funding for small businesses, will allow Upserve clients the ability to select loan offers built into their existing suite of restaurant software.
The partnership solves a very real need that many restaurants struggle with: finding easier access to capital. And this is just one example of Square's active expansion efforts.
Unlike most other companies, Square designs both its software and hardware in house. This provides a serious edge to Square since it can quickly optimize its entire system without waiting for others. One vexing issue solved by Square's unique position is card reader speed. The company is continually reducing card reader speed with an ultimate goal of three seconds. A recent speed reduction of 25% to just over four seconds reveals Square is well on its way to the goal. Also, Square has quickly morphed to embrace the shift to chip cards. Currently, over 75% of all cards processed via Square contain chips.
One of the hallmarks of long-term successful technologies companies is the ability to improve and morph with never ending change. Square has proven its mettle many times in this regard.
Risks To Consider: Square is on the forefront of the mobile payment revolution. However, it is critical to note that competition from upstarts as well as embedded technology companies. Despite having an enormous first mover advantage, the competitive risk is very real for all technology companies.
Action To Take: Shares have found support at the 200-day simple moving average setting up an ideal buy opportunity. Earnings are expected to be released on November 1, and I expect a solid estimate beat with shares breaking out higher. Buy now at $11.25 with initial stops set at $9.23 per share and a target price of $17.00 per share.