After Square’s (NYSE:SQ) IPO flopped in 2015, many in the financial press were quick to call it a money-losing unicorn startup that shot for the moon and came crashing back to earth. The naysayers were as wrong about SQ stock then as they are now.
SQ trades at a lofty multiple of 67 times this year’s earnings. That’s more than double the valuations for PayPal (NASDAQ:PYPL), MasterCard (NYSE:MA) and Visa (NYSE:V). Square is growing at a faster rate than its rivals even though it is slowing overall.
Analysts are forecasting SQ 2019 revenue growth of 41.8% and 28.4% in 2020. PayPal’s 2019 revenue growth is expected to be 14.9% and 16.9% the following year. MasterCard’s 2019 sales are expected to increase by 12.8% this year and 13.5% the following year. Visa’s 2019 revenue growth is expected to hit 10.7% in 2019 followed by 11.3% in 2020.
Critics Attack Square’s Spending
Critics are slamming the company for increasing its spending at a time when many of its rivals are doing the same. Marketing, for one thing, needs additional attention since only 8% of potential Square customers know the company’s product line very well.
Some of the money for these investments is being redeployed from the sale of Square’s underperforming Caviar food delivery business. DoorDash acquired Caviar for $410 million in August 2019.
Square’s redeployment of investments is important since SQ recently rolled out equity trading on its Cash App. The company must now boost brand awareness and encourage more consumers to use Cash App’s trading features.
“… Square will double down on spending into 2020 to boost brand awareness and cross-sales in the Seller business and add products to drive [Cash App] engagement, including investment services. This will keep margin flat in 2020 at about 18%, below consensus,” Bloomberg Intelligence’s Julie Chariell said in recent commentary.
SQ Stock Will Reward Patient Investors
It doesn’t take a crystal ball to predict that better times lie ahead for Square. Maybe 2020 will be the year the company’s investment starts to take off. Keep in mind that analysts who have raised concerns about SQ’s spending would be just as mad at the company for NOT investing enough in its business.
To be sure, SQ has got plenty of challenges. Competition from rivals including PayPal’s Venmo is heating up. Square’s business, though, remains solid.
During the most recent quarter, SQ’s gross payment volume increased to 25% to a better-than-expected $28.2 billion. Gross payment from large sellers, those who generate more than $125,000, grew 37% year-over-year. Plus, large sellers contributed 51% of the quarter’s total gross payment volume.
Wall Street analysts have an average 52-week price target on SQ stock of $72, roughly 12% above where it currently trades. SQ shares are a speculative bet for most investors. The shares may bounce around for a while but will go higher over the long run.
As of this writing, Jonathan Berr did not hold any of the aforementioned securities.