In Focus: Square and Jay-Z
Last week Square (SQ) entered the streaming music business by acquiring the Tidal music streaming services. This is big on a few different levels, but first I'll discuss the investment side of this story for the investors considering Square.
Level I - Square
I always knew Tidal would get acquired, I just thought it would be by Netflix, and that Netflix would add a music streaming service to their bundle as well as add a Shazam like feature, which would allow viewers to see song information on songs playing in a show or movie. I was totally wrong about all of that, but I was right about Square.
Back in 2018, after Square's CFO left the company, I said if the company traded down to $60 per share, which at that time would've made it an $18 billion enterprise, that it would be a buy. My thesis was it's the cash register of a generation, and I don't know the name of the cash register company of the last generation. At $18 billion, the cash register machine of a generation would be a bargain, and it was. Even for those that don't own a business, they'll know a Square terminal when they see it.
After the 2018 investment idea Square transformed itself into something bigger than a cash register machine company, it became a real financial / tech company or FinTech, and if there are any doubters, look at the rise of the stock during 2020. From the March 2020 lows to the end of 2020 Square rose 471%. With small restaurants closed, and new restaurants not opening, it appeared Square would be dead in the water, but because of its transformation from cash register company to FinTech company, investors saw value at $39.00 a share in March 2020.
Square also did a lot to help itself by turning a profit in 2019 and creating positive free cash flow, which are two big milestones for a growing tech company.
When the rumor of Square acquiring Tidal became public in December 2020, Benzinga's article alluded to the vision of Jack Dorsey to make Square a collection of companies, with Tidal being one of those companies. If true this would be an extremely smart play by Jack, and at the current price Square may be a big bargain for long term investors.
Wall Street wasn't impressed by the Tidal acquisition, and the stock sold off on Friday and traded down to a low of $191.36, but the breach of $200 per share triggered heavy buying and caused the stock to only close down 1.97 points on Friday. Wall Street wasn't happy about the acquisition, but at the same time investors realized $200 per share for Square was an extremely good deal.
As of this writing Square is a $98 billion company with $3.8 billion in cash and short term investments, that's enough resources to make things happen. What excites me as an investor is that Square has proven to be a profitable business with above-average growth potential worthy of an investment on its own, if it can strategically add other profitable or growing business under the Square banner, things can only get better for Square investors. I'm excited to see where Square will look next for its next major acquisition.
Level II - Jay-Z
Square acquiring a majority stake in Tidal hasn't come with the same fanfare from Jay-Z supporters as LVMH acquiring a majority stake in Jay-Z's Armand de Brignac Champagne, but I think the Square acquisition will be the bigger deal in the long run because it comes with a Square board seat.
As I've already mentioned Square has transformed itself from a cash register machine company into a financial company, and Jay-Z having a board seat in a financial company can have a tremendous impact.
Access to capital for people of color has been a big issue that only a small number of people have been paying attention to.
The act of buying a house is an exercise in hoop jumping to start for people who have everything together, but being a person of color that has everything together and buying a house is an exercise in hoop-jumping, while hula-hooping, and doing the double-dutch all at the same time.
Also, entrepreneurs of color are still facing difficulties securing the startup funding needed to grow their businesses. Unfortunately, there hasn't been enough representation in traditional banking to really help move things to a better place, Stanley O'Neal and Kenneth Chenault could only do so much if they could do anything at all, because CEOs are typically directed by their boards. So if helping underserved communities wasn't on the agenda for the Merrill Lynch or American Express boards, then there was little that O'Neal or Chenault could do from their positions.
It's no secret, people are fed up with traditional banking and traditional financial institutions. It's because of this we've seen the rise of Bitcoin over the last decade, the rise of Robinhood over the last several years, and the rise of apps like Venmo and the CashApp.
The idea of what a financial institution is or looks like or what a bank is and looks like is changing. Your kids, when they're old enough, could have their first checking accounts with Square or PayPal or even Walmart, with those checking accounts having all of the same features as a Chase Checking account. Your kids when they're old enough could possibly use Coinbase or Robinhood to get a mortgage. Jay-Z securing a board seat in the changing landscape of finance could be a big win if he can influence the flow of capital to people of color and communities that are in need.
P.S. I need to make it abundantly clear that I am in no way trying to insinuate that Stanley O'Neal or Kenneth Chenault didn't do enough or could have done more.
I remember in 2002 when O'Neal earned the Merrill Lynch CEO position. When I read that headline on the day I had the feeling you get when your favorite album by your favorite artists wins the Grammy, or your favorite movie with your favorite actor wins the Oscar, or your favorite team wins the championship. It was a big deal to me then and it's still a big deal to me. Both O'Neal's and Chenault's promotions to the CEO roles of major financial institutions is something that I have always celebrated, along with Richard Parson's time as Time Warner's CEO.