Weeks ago, I called Square (NYSE:SQ) one of the most oversold opportunities on the market. Around that time, shares dropped 35% to $56.39 on a decline in gross payment volume. However, as I also argued, a good deal of negativity had been priced into the stock.
Even after a slight rebound to $64.10, I still believe SQ offers considerable opportunity. After all, SQ remains one of the most disruptive companies in the world, allowing anyone to turn their mobile devices into a portable cash register.
Square Stock Is Still Fundamentally Strong
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.
In its third quarter, the company topped estimates thanks to strong growth in its Square Cash consumer app. Adjusted EPS jumped to 25 cents a share on revenue of $602 million. A year earlier, it earned 13 cents on revenue of $431 million.
Analysts were looking for EPS of 20 cents on $596.4 million revenue. Third quarter gross payment volume (GSV) was up 25% to $28.2 billion, which also beat estimates for $27.9 billion.
Subscription and services-based revenue came in at $280 million, up 68% year over year. Subscription and services-based gross profit was $216 million, up 82% year over year. All were driven by growth in Cash App, Square Capital, and Instant Deposit for sellers.
Going forward, the company expects revenue of $4.42 billion to $4.44 billion, as compared to previous forecasts for $4.22 billion to $4.28 billion.
Analysts Still Bullish on SQ Stock
“We believe the slate is now truly clean, and Square’s performance is greatly derisked for 2020,” Moffett Nathanson analyst Lisa Ellis noted. Results that were “so…much…better” followed a “painful” 12 months for investors. Results show that GPV “has already stabilized and begun reaccelerating,” while Square “reset margins to a conservative level to reflect the much-needed seller sales and marketing investments.”
Ellis also reiterated her “buy” rating with a price target of $85.
Cash App Another Sizable Catalyst for Square Stock
Another big driver for the stock is Cash App, which will allows 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.
Square will also benefit from strong e-commerce demands. According to eMarketer, global e-commerce will rise nearly 21% in 2019 to $3.535 trillion. By 2021, global e-commerce could reach $5 trillion. As digital payments continue to grow, SQ stock will benefit with the company’s Cash App processing hardware and software.
Bottom Line on Square Stock
Technically, SQ stock has been consolidating in a tight range for most of 2019.
However, with e-commerce growth, strong earnings, and its Cash App, I’d like to see SQ stock breakout to test prior highs of $101 set back in late 2018. 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.
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.
