Why the Rally of Square Stock Can Accelerate

Square, (NASDAQ: SQ) stock is having a good year, as its shares have jumped 32% in 2019. Even so, Visa, Inc. (NYSE: V) is performing slightly better, as it has rallied 34%, while MasterCard Incorporated (NYSE: MA) has surged 45%.

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Was Square’s  weaker-than-expected second-quarter guidance enough of a reason to justify the underperformance of SQ stock? Investors might be wondering what the  chances are of SQ stock surging if the company’s Q2 results beat analysts’ consensus estimates.

On May 1, Square forecast second-quarter earnings per share  of 14 cents to 16 cents, below analysts’ average estimate of 18 cents. But it expects revenue in the range of $2.25 billion – $2.28 billion, above its previous forecast of $2.22 billion – $2.25 billion.

The company’s outlook may be too conservative. There are indications that merchants who have the company’s debit card, known as Square Card, have used it to make purchases worth  over 20% of their total gross payment volumes. That suggests that the card is a good fit for sellers and will help them build their businesses. In the longer term, the card will contribute significantly to SQ’s revenue, helping to boost SQ stock.

Square’s Financial Priorities

Square is still looking to increase its EBITDA margin. For 2019, it continues to estimate that its EBITDA will rise 60% year-over-year. And to get there, management is limiting the growth of the company’s costs while focusing on improving its operations. Looking ahead, Square’s EBITDA growth will continue to outpace its adjusted revenue growth, just as it has for each of the last five years. SQ stock should continue to benefit from that trend.

Square will keep re-investing its profits back into its business. It will continue to invest in two of its hardware projects, Square Register and Terminal. Its investments in software will broaden its customer base, as improvements in its software will enhance the experience of all its customers, from very small to very large. And as more large businesses sign up with Square, Square’s revenue will keep growing. Plus, with over 50% of Square’s large customers using two or more of its products, its ecosystem is strengthening.

Growth Opportunities Ahead

Governments are trying to encourage more individuals and businesses to use payment cards. So as they incentivize sellers to process payments digitally instead of using cash, Square’s business will grow further. Square Stand and Square’s contactless and chip card reader allow sellers to automatically pay wirelessly or through a wire. Square’s partnership with Japan’s  Sumitomo Mitsui Banking Corporation is also a growth opportunity that can boost SQ stock. With the bank distributing Square’s reader in all of its branches across Japan, Square’s market share in the nation is growing.

Square has a moat that other e-commerce platforms do not have. It focuses on all transactions, not just  e-commerce. Moreover,as Square improves the experience of its customers, it will win more business, boosting its revenue and SQ stock.

The Valuation of SQ Stock

22 analysts have an average price target of $86 on Square stock, about 16% above its current level. Indeed, even though the valuation of SQ stock is rather high, its strong brand will help it accelerate its revenue growth. Its brand name is synonymous with “mobile payment app.” As a result, Square has a good chance of becoming the first app people think of when it comes to business transactions.

Investors who are bearish on SQ stock may use the 10-Year DCF Revenue Exit model to bolster their case. Assuming revenue growth slows to around 10%, then Square stock, which closed at $74.26 on Wednesday, is already trading around its fair value.

It will take more time for Square’s market share growth to justify the price of SQ stock, so investors buying the stock today need to wait for the company’s marketing efforts and product development initiatives to pay off. For example,  the company has not done much to promote Square card. There will be a lot of opportunities for Square to increase its marketing efforts. But. for now, the company is prioritizing product development. Once its products are more beneficial and work flawlessly, Square will market them more aggressively.

The Bottom Line on Square Stock

Last month, Square stock ended a prolonged downtrend by bouncing off $60, which was its  low point for 2019. Consider waiting until after the earnings report on July 31 after the market closes before initiating a position in Square stock. If the company raises its 2019 guidance, then SQ stock could attract more buyers, causing the stock’s rally to accelerate.

As of this writing, the author did not hold a position in any of the aforementioned securities.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/why-the-rally-of-square-stock-can-accelerate/.

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