Nomura analyst Dan Dolev is ever-optimistic about Square (NYSE:SQ) as the digital payments firm takes its first tap into the U.S.’s $700 billion restaurant industry.
Within the last decade, Square has gone from being a mere idea to one of the U.S.’s leading merchant service aggregators. The company’s expertise spans from financial services to e-commerce, and just about everything in between. In May, the ambitious firm launched Square for Restaurants (SFR), a point-in-sale system that assists restaurants in managing both online orders and the complications of everyday work.
Following Square for Restaurants’ commencement last month, Dolev immediately hopped on the SQ train. Dolev, favorable of Square stock to begin with, sees this new business as a great opportunity for Square to get involved in America’s massive food industry and push its stock through the roof. The analyst’s optimism about SFR’s potential stems from a combination of promising factors, starting with the restaurant industry itself and the surging popularity of online ordering.
There’s no doubt that Americans love to eat, and Dolev believes the steady-growing $650-$700 billion U.S. industry is the perfect platform for Square’s new technology. The analyst predicts that if Square can penetrate roughly 10% of the ~350,000 independent restaurants in the U.S., SQ stock will exhibit at least 10% upside in each of the next three years. Dolev maintains that 10% (35,000 restaurants, 5% of overall market) is a modest estimate, especially because he is not assuming any SFR involvement in chains. Square for Restaurants actually reaps profits via payment processing charges and sales of its ancillary software/services, so if it can exceed 35,000 locations or become implemented in even a few chains, the analyst expects upside potential eclipsing 30% in the next three years.
With little to no chance of America’s restaurant industry shrinking for years to come, there is miniscule concern about its stability. Additionally, in the last few years, while the number of people ordering from restaurants has not decreased, the number who actively goes out to them has. The demand for online ordering has since skyrocketed, and restaurants have had to adapt. Square for Restaurants helps businesses manage online order tickets, giving them a unified view of their sales and allowing them to understand their exact online vs. in-store revenue flows.
The potential of this business model does not stop here. Dolev is also so optimistic of SFR because of its wide variety of services and its connection to Caviar. In addition to handling all the complexities with online ordering, Square for Restaurants provides unique services such as organizing floor layouts, managing employee scheduling, and measuring overall performance. The analyst believes that SFR is the key for restaurants to run smoothly, maintain their fast pace, and easily adapt to the technicalities of daily work. Dolev, though, is arguably most supportive of the business because of its integration with Caviar, a high end restaurant delivery service also owned by Square, Inc. Implementing SFR and Caviar in the same restaurants could help both businesses grow considerably, and Square would profit from both of them.
Between SFR’s ability to provide quick, particular services, its ties to Caviar, and its vast opportunities in the food industry, Dolev envisions plenty of success for the new business. Square for Restaurants could be a huge stride for SQ’s profitability as well as its stock price. The only negative outcome Dolev foresees is the competition SFR will create with similar U.S. merchant acquirers. For example, since 20% of Global Payments Inc’s (GPN) U.S. GPV comes from restaurants, it could take a big hit as SFR’s popularity grows. GPN’s Heartland channel, specifically, generated 35% of its revenue volumes directly from restaurants, so Square for Restaurants poses an even greater threat to it.
Net net, Dolev rates SQ a Buy with an $82 price target, which implies a 36% upside from where the stock is currently trading. (To watch Dolev’s track record, click here)
TipRanks suggests a Moderate Buy consensus for SQ. Of the 18 analysts polled in the last three months, 9 are bullish on Square stock, 8 are sidelined, and 1 is bearish on the stock. With a 12-month average target price of $61.73, its return potential stands at nearly 2%.