Mobile-focused payment processing company Square Inc (NYSE:SQ) is set to report Q1 earnings after the bell on Wednesday. I think the results could be quite good, and I think it makes sense to get behind SQ stock before the report if you can.
After an up-and-down first few months as a publicly traded company, Square shares have been on a tear since mid-2016. A very good August 2016 earnings report got the ball rolling. Since then, SQ has fired off a string of impressive quarterly results while the mobile payment processing has grown in popularity.
That has powered the stock up more than 100% off its July 2016 lows.
I don’t think this string of positive earnings reports is going to end tonight. All signs point north at the moment. Yes, the valuation is high, but the business and the stock have a head full of steam right now.
Here’s why you should get bullish on SQ stock, and fast.
Why Square Likely Had a Good Quarter
In what could be a sign of what is to come for Square, PayPal Holdings Inc (NASDAQ:PYPL) just reported a monster quarter. Growth was impressive in every core operating metric. It was the company’s largest organic quarterly increase in active accounts in three years. Merchant services volume grew 30%. Total payment volume was up 25%. The number of payment transactions per customer grew 12%.
Clearly, the digital payment trend is just getting started.
But of special importance to SQ stock is the real growth driver: mobile.
PayPal reported that mobile payment volume was up a scintillating 51% in the quarter. That compares to 53% growth last quarter, and 56% two quarters ago. Growth is slowing a little bit, but not by much. Its clear that consumers are rapidly adopting mobile payment solutions. On the other side of things, PYPL’s mobile-based app Venmo is also on fire. Venmo volume surged a whopping 114% to $6.8 billion in the quarter.
All in all, what we are seeing from PayPal is that the whole growth story is centered around mobile. That is an industry-wide trend that bodes especially well for Square, the most popular player in the mobile payment processing space. Simply pu, as more and more consumers adopt mobile payment options, the more and more businesses will use Square.
In this sense, Square is a pure play on the growth in mobile payments. That trend looks to have only grown stronger over the past several months, setting SQ stock up for what could be a big beat.
I also think that Square for Retail could have been a huge catalyst for SQ over the past several months. The new system was launched at the beginning of February (so toward the beginning of Q1), and it is Square’s first industry-specific point-of-sale solution. With mobile payment processing growing in popularity, it feels like Square for Retail could’ve had a massive February, March and April.
That should flow-through to both good Q1 results and a strong Q2 guide.
Bottom Line on SQ Stock
There is no hiding the fact that Square is richly valued. Wall Street doesn’t even see the company netting positive earnings until 2019, and even then those earnings are expected to be a measly 5 cents per share.
Thus, Square stock is trading at nearly 375 times earnings that are three years out.
But the growth is there (revenues are expected to grow in the 25%-plus range over the next several years). The balance sheet is clean with a lot of cash and no debt. Cash flows are positive and the capex rate is fairly low. Once the business scales, SQ could produce a lot of cash and dramatically grow its balance sheet.
I like that dynamic, and believe Square will continue to grow at a rapid rate given secular growth in mobile pay. The market has fallen in love with SQ stock over the past several months, and I don’t see the honeymoon ending any time soon.
As of this writing, Luke Lango was long SQ.