Square (NYSE:SQ) stock has moved sharply lower in the recent past. From near-term highs of $82.32 in July, SQ stock currently trades nearly 28% lower around $59.80. The downside has been triggered primarily by weaker-than-expected earnings per share guidance for the third quarter of 2019.
However, I am of the opinion that the correction is a good opportunity to accumulate SQ stock. Current levels are attractive with an investment horizon of 1-2 years.
Here are some factors that could serve as the stock’s upside catalysts.
Stock Trading Service in Pipeline
Last week, Bloomberg reported that SQ is testing a free stock trading service that would be a part of Cash App.
It is worth noting that Cash App reported Bitcoin revenue of $125 million for Q2 2019. The potential launch of a stock trading service can be another revenue growth trigger. Additionally, the impact on valuations might be significant if the service grows at a robust pace.
It would be interesting to look at Robinhood, which offers commission-free stock and cryptocurrency trading. The company’s valuation was pegged at $7.6 billion considering the latest round of funding in July. It is estimated that the company has 6 million active users.
On the other hand, Cash App had 15 million active users as of December 2018. Clearly, there is potential to monetize the user base. Even if one third of current Cash App users use the stock trading service, the company would be on par with Robinhood in terms of active users.
I also believe that SQ is just beginning to make inroads in the broader segment of financial services. The company’s re-application for a bank license is still pending. Approval on that front could serve as another major stock upside trigger.
I must quickly point out here that net revenue from the Cash App has increased from $1 million in Q2 2016 to $135 million by Q2 2019. As Square is building a robust seller and consumer ecosystem, its journey has just started in terms of revenue upside.
Seller Ecosystem Will Continue to Grow
One of the concerns that has translated into a lower SQ stock price is the year-over-year growth trend in gross payment volumes. For Q2 2018, the company’s gross payment volume growth was 30% — and it has gradually declined to 25% in Q2 2919. Even the adjusted revenue growth (year-over-year) was 60% in Q2 2018 and has declined to 46% in Q2 2019.
While these factors have translated into lower price for Square stock, I see the following positives.
For Q2 2017, 19% of the gross payment volume was from sellers with an annualized gross payment volume in excess of $500,000. For Q2 2019, this has increased to 26% of the gross payment volume. In other words, SQ has been able to attract large sellers in its ecosystem.
Square acquired Weebly in 2018, and I believe that the full impact of the acquisition is yet to be seen. It was in Q1 2019 that the company launched the new online store, which integrates Weebly technology with Square.
The new store will be providing retail sellers with an industry-specific omni-channel solution. In the coming quarters, the new platform is likely to deliver strong growth. It is also important to note that 40% of Weebly’s paid subscribers are outside the United States. This should help SQ in global expansion.
Therefore, it might be too early to conclude that Square is moving towards a sustained trend of muted growth. It is entirely likely that the trend reverses in the coming quarters.
My Final Thoughts on SQ Stock
As of June 2019, Square reported cash and cash equivalents of $1.2 billion. For the first half of 2019, the company’s operating cash flow increased to $166 million as compared to $71 million for the first half of 2018. With ample financial flexibility, Square is positioned to invest more on product development, which can trigger growth. In addition, acquiring a banking license could be a Square stock upside trigger.
The recent correction in the stock has been sharp, and it has been associated with fundamental factors of relatively slower growth than just profit booking. However, I am of the opinion that it’s too early to conclude that Square will move to a lower growth trajectory.
I expect a bounce back in growth fueled by the potential launch of a stock trading service, growth in Cash App monetization and the launch of more brands in its new online store platform.
Overall, I am positive on SQ stock at its current levels. But, I do advise light exposure rather than a big plunge in the stock.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
