For all of 2017 and most of 2018, payments processor Square (NYSE:SQ) was a shining star on Wall Street, as investors bought into the secular growth narrative of Jack Dorsey’s next new thing becoming an important player in the global commerce ecosystem as an enabler of non-cash payments. SQ stock subsequently roared from $15 to $100.
But, in late 2018, SQ stock lost its footing. Part of the stumbling was Square’s fault. Growth started to slow against the backdrop of rising competition. The entire market turned upside down in late 2018 as rates were on the rise, trade tensions were boiling up, and global growth was cooling. The SQ stock price halved to $50.
So far, 2019 has been a better year as Square stock has rebounded. Here again, the rebound is one part Square, one part market. Square’s growth rates have remained robust and margins have powered higher, while the market has been boosted by falling rates, cooling trade tensions, and stabilizing global growth. SQ stock has consequently rebounded to $80.
SQ Stock Rally has Legs
This 2019 rally in SQ stock isn’t over just yet. Square’s internals will remain favorable. Growth rates should remain robust, and margins should continue to march higher. At the same time, the market’s externals will likewise remain favorable, as rates project to remain lower for longer, the U.S. consumer economy is positioned to remain healthy, and trade tensions will likely continue to cool off.
Net net, I’m sticking with the rally in Square stock. This is a long-term winner that has found its winning stride again in the first half of 2019, and will maintain that winning stride into the back-half of the year, too.
Square’s Internals Improve
Square’s internals improved in the first half of 2019, and as they did, SQ stock rallied. Fortunately, those internals should keep improving in the back-half of the year, too, paving the path for further gains in Square stock.
The secular growth narrative here is quite favorable. The world is pivoting from cash transactions, to non-cash transactions. As it does, merchants of all shapes and sizes need help processing non-cash transactions effectively, rapidly, and at scale.
Square provides technology which helps them do that. On top of that, Square is building an ecosystem of software services around those non-cash payment processors, in order to increase merchant and consumer wallet share during this transition towards non-cash payments.
Non-Cash Growth Fuels Trajectory
So long as consumers keep pivoting towards non-cash payments (they will) and Square keeps innovating to expand its ecosystem of products and services (they will), Square will remain on a robust long-term revenue and profit growth trajectory.
This trajectory will remain favorable in the back-half of 2019. Around 30% of all transactions are cash transactions, yet only ~10% of consumers favor cash transactions. This disconnect ensures that Square’s volume growth through its non-cash payment processors will remain robust for a lot longer. Further, Square’s business debit card is reportedly gaining traction and the Cash App is gaining momentum, all while margins continue to ramp.
Broadly, Square’s revenue and profit growth trajectories should remain favorable in the back half of 2019. As they do, SQ stock should continue to trend higher.
Market Externals Remain Favorable
Also helping sustain the rally in SQ stock in the back-half of 2019 will be favorable market externals.
Rates are low, and with rate cuts coming, they should only go lower over the next few quarters. As they go lower, they will help support stretched valuations for growth stocks and risk-on attitudes in the equities market. They should also support continued robust credit card spending, which will provide a direct tailwind to SQ stock.
Meanwhile, the U.S. consumer projects to remain healthy in the back-half of 2019. Unemployment rates are at record lows. Wage gains are hovering near decade highs. Trade tensions are cooling off. Credit is good. The personal savings rate remains healthy. Consumer debt levels are relatively low. All in all, the consumer environment should remain healthy.
Further, trade tensions between the U.S. and China should continue to cool after the two countries agreed to a trade war truce at the G-20 Summit.
Putting it all together, the market externals in the back-half of 2019 lend themselves to further strength in Square stock.
Bottom Line on SQ Stock
SQ stock is a long-term winner that reasonably projects as a 25%+ revenue grower over the next several years, with healthy margin drivers that could spark 35%+ profit growth. By 2025, $4.50 in EPS is doable for Square. Based on a payments average 30x forward multiple and a 10% discount rate, that $4.50 in EPS provides fundamental support for a near $85 price target for SQ stock by the end of 2019.
Given favorable outlooks for Square’s internals and externals, I think that is exactly where SQ stock will wind up by the end of the year. As such, with SQ stock presently hovering below $80, the bull thesis here remains favorable for healthy upside in 2H19.
As of this writing, Luke Lango was long SQ.
