Square Inc. (SQ) came public in November 2015 and closed its first trading day near $13 and traded near highs of $16 earlier this year, but since have come back down to $9, near the post-IPO low from February just above $8.  At this level Square becomes interesting with the recent options activity.

Looking at recent options activity in Square, on 6-10 a trader sold 10,000 September $9 puts to open at $1.10, willing to be long 1M shares a $7.90 cost basis.  This past week has also seen some size buys of July $9 calls. 

Square aims to be the future of commerce, and its solutions address not only payment, but also receipts, employee clocking in/out, analytics, payroll and marketing.  SQ also has lower hardware costs, faster settlement, lower processing costs and a quicker approval process for merchants. There are a lot of disruptive trends in Square’s favor including the shift to electronic payments, SaaS, Mobile, and EMV/NFC. 

The $3B provider of mobile payment services for small businesses is now trading 2.17X Sales, 1.4X FY17 EV/Sales, and 7.3X Cash with no debt.  SQ is expected to hit 27% revenue growth in FY16, 22% in FY17 and 30.9% in FY18.  The company is set to lose $0.62/Share in 2016 and does not expect profitability until 2019. Square claims to have an average transaction value of $53.  PayPal (PYPL), a close competitor, trades 3.2X FY17 EV/Sales with just 15% sales growth.

Analysts have an average target on shares of $13 with 10 Buy, 11 Holds, and 1 Sell rating.  Barron’s was cautious this weekend noting the recent 250M share lockup expiration, sizable short float, competitive environment, and long path to profitability.  On 5-23 CLSA upgraded shares to Buy with a $14 target and on 5-17 Compass Point upgraded to Buy with a $13 target, citing the compelling secular exposure, and sees near-term risks already priced into shares.

With Apple (AAPL), Samsung, and Google (GOOGL) all building payment networks, Square can be seen as a potential acquisition target bringing its strong Tech advantages to the table. 

Institutional ownership jumped 14.5% in Q1 as 41 funds opened new positions, 36 added, 21 closed, and 18 reduced.  Coatue Mgmt. and OZ Mgmt. were two notable firms taking new positions, and although Tiger Global reduced its holdings, SQ remains a top 10 position. 

Square clearly has a risky nature with a lack of profitability and some risk to its high rate loans from its Square Capital division that could come under scrutiny from the Department of Treasury.  However, at this valuation shares are an attractive value with all of the positive tailwinds, potential M&A and recent options positioning suggesting minimal downside.