Since peaking at around $80 a share, Square, Inc. (NYSE: SQ) is stuck in a downtrend. Selling accelerated and failed to hold the $70 when, on May 5, the company reported first-quarter results. Square issued a second-quarter outlook that trailed consensus estimates, which wasn’t a great thing for Square stock.
Investors need to know what changed to slow the company’s previously strong momentum. Trading recently at around $63, the stock has unfavorably high valuation multiples. So, given the revised second-quarter guidance, what is Square stock worth?
New Product Highlights in First Quarter
Through the first quarter, Square enhanced its omnichannel offering by launching the Square Online store.
By syncing online and in-person data, seller items, orders, inventory, and prices are all synced automatically. This strengthens Square’s ecosystems and the value of the seller tools. And by launching the Square Online store globally, the company expands its addressable market. It launched the online store in the United States, the UK, Canada, and Australia.
In Japan, Square launched Square Stand and a Square contact person chip reader. This enables sellers to pay wirelessly or through a wire. Processing payments is as easy as connecting a Square reader to an iPad device. Given the ease in quickly setting up Square payments, expect usage growing rapidly.
Last but not least, the company’s launch of Square Invoices should accelerate full-year revenue growth. The product targets a market opportunity worth $1 trillion in consumer invoices, and that is just the market size in the U.S. alone.
Previously as a feature on Square’s Dashboard, it is now a standalone mobile app. Already, Invoices processed over $5 billion in GPV in the last year through 350,000 active sellers. Due partly to the incredible growth opportunity here, Square raised its full-year outlook.
Outlook
Square increased its fiscal-year 2019 revenue guidance by $60 million, to a range of $2.25 billion – $2.8 billion. Analysts expected revenue of $2.25 billion. With revenue at a 43% growth rate, markets may bid shares lower because it expected better numbers. Still, in the first quarter, GPV from mid-market sellers grew 50% from last year.
Its Cash App performed strongly and contributed to Square’s adjusted growth rate of 59% in Q1. The company will also build revenue momentum based on strong monthly active users. In the previous (Q4) period, Square reported 15 million monthly active users. And in the last quarter, Cash Card increased engagement and monthly active customers.
Positive Catalysts
The success of Square’s Cash App is a positive catalyst. Cash App volume grew by 2.5 times in the first quarter. Add the positive impact of network effects and engagement growth and investors will have little doubt that revenue growth could exceed the company’s forecast for the year.
Look for the cost of acquiring monthly active users falling, thanks to network effects. Add instant deposit, Cash Card, instant deposit, P2P funded through credit cards, and cryptocurrency as just a few Square offerings and markets will realize Square may potentially report yearly results exceeding its forecast.
Square’s EBITDA guidance of over 60% year-over-year growth will result from disciplined cost management. Its consistent performance is another positive catalyst. Management forecasted EBITDA growth outpacing adjusted revenue growth this year. This is what it accomplished annually in the last five years.
Effective Marketing Campaigns
Square will build upon its strong net promoter scores in many of its international markets by running brand campaigns. Its campaign in the U.K. in progress is already reaching the intended audience across its portfolio. As its brand awareness grows, Square will take a portion of processing transactions associated with household spending, and as its market share grows, so too will its revenue.
Investors have plenty of credit card services to consider. PayPal Holdings (NASDAQ: PYPL) is valued with a market cap of $128 billion, nearly five times bigger than that of Square. Visa Inc. (NYSE: V) has a $352 billion market cap but the stock also trades at lower valuation multiples. Still, Visa is so large that its revenue growth will not match that of Square’s rate.
The Bottom Line on Square Stock
Square’s second-quarter results will lag estimates but the company expects higher full-year results. Instead of bidding the stock higher, the market dumped the stock instead. Wall Street analysts are bullish on Square stock and have an average price target of $85 (per Tipranks). If it gets there, the stock has an upside of 35%.
When Square reports next quarter, an earnings beat should send the stock to at least $80. This would bring the stock back to its March high.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
