While the broader market has been enjoying a relentless run to all-time highs, investors in Square (NYSE:SQ) can’t say the same thing. While Square stock does boast year-to-date and one-year gains of 14% and 26%, respectively, that is not a fair representation of what a bumpy ride it’s been.
In almost any other circumstance, those returns would very impressive. But considering that U.S. equity markets basically plunged into a temporary bear market in the fourth quarter of 2018, these returns make reality seem better than it is.
Let’s put it this way: Measure from a week after the start of the year (i.e., Jan. 8th instead of Jan. 1), SQ has returned just 1.3%. Push that time period another week (Jan. 15 to now) and shares are actually lower. In essence, short of the quick bounce back from the Q4 hammering, Square stock has been a total dud.
Further, Square has lagged its major peer PayPal (NASDAQ:PYPL), which is up 30% in 2019 and 41.5% over the past 12 months. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Invesco QQQ Trust (NASDAQ:QQQ) are up 28.9% and 37.7%, respectively, this year, and 37.3% and 48% over the past 12 months.
Breaking Down Square Stock
For Square stock bears, the two biggest issues have been valuation (an easy target) and increasing competition.
Regarding the former, valuation concerns have certainly eased as shares remain well off the highs and as growth continues to hum along. In respect to the latter, increasing competition is a negative, but it’s clear that Square is the preferred provider for small- and medium-sized business.
My bigger issue is this: At a time when the U.S. economy continues to push higher, with equities at all-time highs and with a strong consumer, Square stock should be doing very well — and it’s not.
All the while, growth remains solid. Analysts expect full-year revenue to hit $2.25 billion, up more than 41% from 2018. On the earnings front, estimates call for 66% growth to 78 cents a share.
For 2020, estimates call for even more growth. Revenue is forecast to come in at $2.86 billion, up 27.2%, while analysts expect earnings of 96 cents per share, up 23.1%. Of course, that leaves SQ stock trading at 66.6 times 2020’s estimates — which isn’t cheap! — but a lot cheaper than it was in previous years.
While Square stock continues to stagnate and as earnings and revenue continue to grow, so too are cash flows. This, it seems, is going unnoticed by investors.
SQ stock boasts operating cash flow of $581 million over the past 12 months. Trailing free cash flow stands at $511 million. The sums aren’t as important as the growth, though.
In fiscal 2016, Square stock approached break-even cash flow and pulled in $101 million in free cash flow in 2017. That figure more than doubled (+130%) in fiscal 2018 to ~$232 million.
There’s still one quarter left in Square’s fiscal 2019 year, but already the company has generated free cash flow of $358.6 million. That’s up 54.5% from all of 2018 and there’s still one quarter to go. The trailing free cash flow figure of $511 million is up 120% from 2018 (although it includes Q4 from fiscal 2018).
Long story short, operating and free cash flow growth is strong and if the company continues this trend, it’s something Wall Street should take notice of in 2020.
Trading SQ Stock
It’s easy to look at the charts for Square stock and conclude that it’s been a dud lately. But let’s remember, this name went from sub-$15 in early 2017 to more than $100 per share in October 2018.
Given that surge, I view the sideways consolidation over the last five quarters as healthy price action. At its 2019 lows, SQ stock was about 46% off its highs. Like other growth stocks I’ve talked about, down 40%-plus is a good rule of thumb for me. Put simply, I like to accumulate these names on massive declines — provided the growth profile is still intact.
For Square stock, it’s clear that the growth is still there, but the stock is not cooperating yet.
Bulls who don’t want to buy at current levels can wait for one of two things: a pullback or a breakout. If it’s the former, look for a dip down to the $55 to $57 area. On a breakout, look for a move over downtrend resistance first. Over that mark — now near $72.50 and declining — a move to $80 is possible.
Over range resistance at $80 and the 2019 high of $83.20 is possible. Above that and SQ stock can really start to rally.