Square (NYSE:SQ) was trading at $82.3 in the second week of July. In a matter of one month, Square stock has slumped by 23% to current levels of $63.3. The sharp decline has been triggered by the company’s second-quarter results and softer guidance for the third quarter.
However, I believe that the market has overreacted on the results and guidance. The decline in Square stock is a buying opportunity because of positives in the quarterly results and other triggers that can reverse the stock sentiment.
Overall, the SQ stock is worth buying in the broad range of $55 to $65.
Since the second-quarter numbers and guidance have come out, the entire focus has been on the near-term negatives. In particular, decelerating growth is a concern noted by the analyst community, in general. If you take a moment to consider the upsides, though, Square gets way more interesting.
A Closer Look at Square Stock
Square Inc has established a robust omnichannel platform that delivers “end-to-end” service. One of the key targets of the company has been to attract merchants with a GPV in excess of $500,000. It is worth noting that the company had 19% sellers with annualized GPV in excess of $500,000 in 2Q17.
This increased to 22% in 2Q18 and further increased to 26% in 2Q19. As the number of big merchants increase, it is likely that the company’s total and adjusted revenue will swell higher.
Also worth noting is that SQ reported adjusted EBITDA margin of 7% in 2016, 14% in 2017 and 16% in 2018. For the second quarter, the company’s adjusted EBITDA margin was 18.7%.
Further, considering the mid-range of the guidance, the company is likely to report an EBITDA margin of 18.3% for 2019. I see sustained margin expansion as a positive. While product development cost is likely to remain high, EBITDA margin expansion can potentially sustain as sales volumes trend higher.
The company also announced the sale of food ordering platform Caviar for $410 million. While this will have a negative impact on revenue, the sale of loss-making Caviar is likely to be positive in the long-term. It allows Square to focus on omnichannel commerce, financial services and expansion in international markets.
Square reported cash & equivalents of $1.2 billion for June2019. Considering the sale of Caviar, the company’s cash buffer is likely to be around $1.5 billion.
While analysts worry about a deceleration in growth, I believe that the cash buffer will be utilized for inorganic growth in focus areas. Therefore, it is too early to assume that the company is moving towards a lower growth momentum and the stock should trend lower.
I remain bullish on the company’s cash app. For the second quarter, the cash app generated $135 million in subscription and transaction-based revenue.
Further, the cash app generated $125 million in Bitcoin revenue. It is worth noting that Bitcoin revenue surged to $125 million in 2Q19 from $37 million in 2Q18. With the cash app having a Bitcoin deposit feature, the app is likely to attract individuals. The growth in cash app revenue is already worth noticing. From $1 million in the second quarter of 2016; revenue has surged to $135 million (excluding Bitcoin). With multiple monetization sources, I am bullish on robust revenue growth to sustain.
Final Words on Square Stock
Considering the factors discussed, I don’t see a near-term growth deceleration as a concern. Square stock should trend higher from a market perspective beyond the near-term growth concerns.
It is worth mentioning that Square continues to work towards expansion in the financial services sector. This includes a potential banking license in the future. The company’s debit card for small businesses is also packed with attractive features and is likely to witness traction.
Overall, Square stock is in a buying zone. I expect organic and potential inorganic growth in the next 12-18 months to take the stock higher from current levels.
As of this writing, the author did not hold a position in any of the aforementioned securities.
