For a brief moment, bitcoin mania gripped Square Inc (NYSE:SQ) stock. In mid-November, Square rolled out the ability to buy and sell bitcoin on its Square Cash app. And SQ stock took off like a cryptocurrency, zooming from $40 to nearly $50 in just over a week.
But the bitcoin-inspired rally was short-circuited recently by BTIG analyst Mark Palmer, who said that “emphatic and unimpeded growth” is already fully priced into SQ shares, and that risks to the growth narrative didn’t suddenly disappear after the company played into the cryptocurrency trend.
Palmer downgraded SQ stock to a Sell with a $30 price target.
And SQ stock fell. Big. Square stock once again hovers around the $40 level — exactly where it traded before the bitcoin rally.
I think this is a good setup to buy the dip in SQ stock. I think this stock will trend to north of $50 over the next 12 months.
Whether or not you believe in bitcoin and cryptocurrencies, there is no denying that there is huge consumer demand for them. Just look at the bitcoin chart. Bitcoin keeps going up because people keep buying it in droves.
Square knows this. Square also knows that, despite huge interest in and demand for bitcoin, not many people know how to buy it. Just look at the search interest chart for “how do you buy bitcoin” — it’s skyrocketing recently.
In this sense, SQ isn’t getting into the cryptocurrency game to validate blockchain technology or support bitcoin. It’s getting into the cryptocurrency game to match booming consumer demand. The move underscores the company’s unparalleled ability to innovate in the payment processing space.
That is a good thing. This innovation and ability to meet heightened consumer demand is a reason to own the stock.
But SQ stock has sold off back to where it was before any of this bitcoin mania. That doesn’t make much sense. Even if the bitcoin move doesn’t prove to be additive to the company’s results, it does serve as proof of Square’s position as a tech innovator. That proof is enough to send SQ stock higher.
From a numbers standpoint, I think SQ stock can head to above $50 over the next 12 months.
Right now, SQ stock is trading at 154 times this year’s earnings for 70% projected earnings growth over the next several years. That equates to a price-to-earnings/growth (PEG) ratio of 2.2.
That is pretty rich. Paypal Holdings Inc (NASDAQ:PYPL) is trading at 40x this year’s earnings for 21% projected earnings growth (PEG ratio of 1.9). Visa Inc (NYSE:V) is trading at 27x this year’s earnings for 15.5% projected earnings growth (PEG ratio of 1.7).
But SQ has bigger growth prospects and is the purest play on mobile commerce growth, so it makes sense that SQ stock has a higher PEG ratio.
Earnings growth in fiscal 2019 is expected to be 60% (versus 70% in FY 2018). This 10% step-down in growth should continue (50% in FY 2020, 40% in FY 2021, and 30% in FY 2022). Consequently, from FY 2019 forward, the compounded annual earnings growth rate will likely look something like 40%.
Given PYPL stock currently trades with a PEG ratio of 1.9 on growth prospects of 20%, a 40% growth story in this space should easily warrant a PEG of 2. This implies a “fair” FY 2019 earnings multiple of 80 for SQ stock. Throw that 80 multiple on FY 2019 earnings estimates of $0.73, and you get a 2-year forward price target of just over $58.
Discount that back 10% per year. You get a one-year forward price target of $53, and a present value of $48.
Bitcoin mania has come and gone from SQ stock.
But the fundamental growth story did get stronger during that time. SQ continues to prove out its unparalleled ability to innovate in a space that has traditionally lacked innovation.
That means this growth story is still in its early innings. Same with SQ stock, which I think has near-50% upside over the next 2 years.
As of this writing, Luke Lango was long SQ.