SQ Stock: Down 15% From Record Highs, Is Square a Buy?
October 05 2021 - 7:23AM
Finscreener.org
High-flying growth stocks in the
technology space have crushed the broader markets by a significant
margin, since the financial crisis of 2009. The elongated bull run
despite the bear market of 2020 has been fueled by a
low-interest-rate environment that has allowed enterprises access
to cheap capital to fund their expansion plans.
But, the ongoing volatility in
equity markets has resulted in a pullback in tech stocks such
as Square (NYSE:
SQ). This fintech giant
is currently trading 15% below its all-time high allowing investors
to buy the dip. Let’s see if Square stock should be part of your
portfolio today.
Square’s gross payment volume is expected to touch $140
billion in 2021
Square has
gained massive traction
over the years by rapidly expanding
its seller ecosystem. Its point-of-sale solutions also include data
analytics, loans, and other products to help small and medium
enterprises expand their business.
Square’s gross payment volume or
GPV stood at just $6.5 billion in 2012 and grew to $106 billion in
2019. In 2021, it remains on track to surpass $140 billion in GPV
this year. The company has successfully onboarded larger companies
on its platform and in the second quarter, enterprises generating
over $125,000 in annualized GPV accounted for 65% of total
volume.
In the same period in 2019, this
figure stood at 55%.
Square’s point-of-sale solutions
primarily derive revenue from merchant fees and the emergence of
larger businesses should positively impact gross margins in the
upcoming quarters.
What next for SQ stock?
Square’s revenue has increased
from $2.21 billion in 2017 to $9.5 billion in 2020, indicating an
annual growth rate of 62.6%. Analysts now expect sales to double
year over year to $19.11 billion in 2021 and increase by 12.5% to
$21.5 billion in 2022. Comparatively, its adjusted earnings per
share are forecast to rise from $0.84 in 2020 to $2.38 in
2022.
A key driver of Square’s revenue
growth will be the Cash App which is a peer-to-peer payment
platform. Between 2017 and 2020, Cash App has seen its monthly
active users rise from 7 million to 36 million, consistently
outpacing rivals such as Venmo. Cash App has targeted younger users
to grow its customer base.
In addition to merchant fees,
this payment platform derives revenue from bank transfers as well
as investments. You can easily purchase or sell Bitcoin on the Cash
App which is the largest cryptocurrency in the world.
The pending acquisition of buy
now pay later or
BNPL company Afterpay will also help Square accelerate
revenue growth, once the deal is closed. The buyout will also allow
the company to expand the Cash App ecosystem that currently
generates $55 in gross profit for each user. Comparatively, it
spends just $5 to acquire a new user.
Square valuation and more
SQ stock has returned a
staggering 1,730% to investors since its IPO six years back. It’s
currently valued at a market cap of $104 billion indicating a
forward price to 2021 sales multiple of 5.4x and a price to
earnings multiple of 120x which might seem expensive. However, the
company’s stellar growth estimates demand a premium
valuation.
Square ended the June quarter
with a cash balance of $5.6 billion and $6.13 billion in debt. In
order to fund the $29 billion acquisition of Afterpay, Square will
have to raise capital in the form of equity or debt, impacting its
robust balance sheet.
But Square will also onboard 16
million customers into its already expanding ecosystem allowing the
fintech heavyweight to cross-sell additional solutions. Afterpay
will be
highly accretive
to Square’s top-line and the company
derived $506 million in gross profits, which rose 96% year over
year.
SQ stock has easily outpaced the
S&P 500 since its IPO in late 2015 and is positioned to
continue its stellar run in Q4 of 2021 and beyond.
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