Here’s Why Square’s Outlook Looks So Bright for 2020

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When Facebook (NASDAQ:FB) introduced Facebook Pay through its site and on its Instagram, Messenger and WhatsApp platforms, it hardly moved Square (NYSE:SQ) lower. And why should it? Facebook has a long way to go before it becomes a credible threat to other electronic payment services.

Here's Why Square’s Outlook Looks So Bright for 2020
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Facebook has a trust issue with users. Having already shared so much of their personal data with third parties, users may avoid using Facebook Pay. Still, its users already donate to causes and send money within the Facebook apps ecosystem. But now, with Facebook Pay, users will have more tools at their disposal to help manage payments. This includes accessing payment history. The service supports most major credit and debit cards, along with PayPal (NASDAQ:PYPL) but it does not support Square. Still, that should not hurt SQ stock.

Results Show Right Place, Right Time

In the third quarter, Square reported adjusted revenue of $602.2 million and adjusted EBITDA rising from $71.0 million last year to $131.3 million. Even though it guided EPS of 19-21 cents, below the consensus estimate of 25 cents, Square stock headed toward the $70 level.

Investors think that the company is in the right place at the right time. Square has Cash App more than doubling revenue, growing it by 115% Y/Y to $159 million. By offering a broad portfolio of tools, plus a redesigned app during the quarter, usage will continue on the ascend.

Cash App even lets users buy stocks instantly, for free and at fractional amounts. That simplifies the investing process and gives users another incentive to use the app. Although it is worth cautioning investors that the app will probably have unfavorable bid/ask prices, the nominal increased cost of the stock transaction is outweighed by convenience. Besides, if stock prices keep going up, Square’s Cash App users benefit from the gains while having more funds in the app.

Strong 2020 Outlook

Investments in the ecosystem will enable Square to explore more opportunities. On the seller side, Square expects healthy profitability and an adjusted EBITDA margin of almost 30% this year. Thanks to scaling the ecosystem, profitability will only improve in 2020 and beyond. But due to investments in the seller business, investors should expect a small drop in margins next year, followed by returns on investments paying off in late 2020 and into 2021.

The positive momentum for Square’s Cash App suggests margins will continue expanding slightly in 2020. When it was first released, the company focused on building a strong network first. As that grew, Square then added features that people would find useful. So, by offering such tools that are not offered anywhere else, Square has a strong moat around the app.

New Tools, Near-term Costs

Square has a suite of tools for sellers that scale, which will promote growth on its platform. Its API strategy offers flexibility for sellers such that its tools are accessible on a variety of systems, from legacy to hardware to inventory systems. Investments in the tools and the platform will continue, adding to the costs.

Square expects to support its product with spending in the sales team staff and account management. With this support, the company can handle taking on bigger sellers and better-known, established firms in the retail or restaurant businesses.

SQ Stock Valuation and Your Takeaway

The 25 analysts who cover SQ stock have an average price target of ~$73 (per TipRanks). Conversely, the pessimistic investor may forecast revenue growing at no more than 25% annually. At a 3.5 times terminal revenue multiple in a 5-year DCF revenue exit model, SQ stock is worth around $68.

Square stock has plenty of upside potential as the company continues to demonstrate wide-spread adoption for its platform. As the user base grows and revenue increases with it, investors should consider holding the stock for the long-term.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/heres-why-squares-outlook-looks-so-bright-for-2020/.

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