Over the last three years, payment processor Square (NYSE:SQ) was one of the hottest stocks on the market. In fact, over that time, SQ stock ran from $8.33 a share to as much as $98, all as Square became one of the most disruptive companies in the world, allowing anyone to turn their mobile device into a portable cash register.
Unfortunately, not even the best of the best stocks can run higher forever.
Since hitting $83 in late July, bears sent SQ stock 35% lower to $56.39 on a decline in gross payment volume. However, it appears much of the negativity has been priced into the stock, and that SQ stock will soon resume its unbelievable uptrend.
Square Stock Is Fundamentally Strong
The last quarter wasn’t bad at all. Second quarter sales and profits came in well above estimates. Adjusted revenue was up 46% year over year to $563 million. Adjusted EPS was up 62% to 21 cents. Analysts were only looking for revenue of $557 million on EPS of 17 cents.
Unfortunately, it did miss on gross payment volume, which fell from 26.7% to 25.3%. However, that was still stronger than many of its industry peers.
Investors may have also overreacted to guidance. In its third quarter, Square expects to post revenue of $590 million to $600 million, and EPS of 18 to 20 cents. While the midpoints of those ranges are below analyst expectations for $599 million on adjusted EPS of 22 cents, the company still has significant upside potential.
Analysts Still Bullish on SQ Stock
Analysts at Wells Fargo believe the stock is fundamentally strong. In fact, analysts just upgraded the stock an outperform rating with an $80 target, noting:
“SQ’s fundamentals remain strong, investor sentiment is overly negative and close to inflecting, and valuation is more attractive than it has been for some time. We believe investors are overly negative and most, if not all, concerns are already reflected in SQ’s share price and valuation.”
Analysts at SunTrust Robinson upgraded the stock to buy from hold, with an $80 price target. All as Square invests in point of sale card readers with “large, inventory-intensive retailers where we believe it currently competes poorly.”
Cash App Is Another Sizable Catalyst
Another big driver for the stock is Cash App, which will allow Square users to trade stocks within the app. According to Bloomberg, the company may soon allow users to trade stocks for free. Perhaps this is part of the reason big online brokers like Fidelity Investments, Charles Schwab Corporation (NASDAQ:SCHW), and Interactive Brokers Group (NASDAQ:IBKR) rolled out zero-commission programs.
Better, in its second-quarter earnings release, Square revealed that Cash App generated $135 million in net revenues during the quarter, excluding Bitcoin transactions. In addition, Cash App accounts for more than half of the company’s subscription and services net revenue, and still has plenty of gas left in the engine.
Plus, the Cash App has been downloaded 59.8 million times already, as compared to PayPal’s (NASDAQ:PYPL) Venmo, which has only been downloaded 52.7 million times as of August 2019.
Bottom Line on Square Stock
Square stock is a long-term winner that hit a temporary rough patch. We don’t believe it’s anything to be concerned with. Instead, we’re focusing on the long-term growth story here.
For one, it appears investors once again overreacted to earnings. Two, with sizable growth prospects, and plenty of bullish analysts, it’s tough to argue for further downside. With patience, we expect SQ stock to resume its powerful uptrend.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
