Square (NYSE:SQ) stock has finally begun its recovery.After spending the last few years trading mostly in the low-$60s per share range, the price of SQ has finally begun to approach $70 per share.
However, its valuation is elevated, and recent history shows that Square stock is vulnerable to bad news. Given its long-term potential and its recent behavior, investors should only buy SQ stock at this point if they plan to hold it for a long time.
Square’s Long-Term Potential
As I stated in a previous article, I like Square stock because it is becoming the Apple (NASDAQ:AAPL) of payments. Square first made its mark by enabling anyone with a smartphone to accept credit card payments. It has expanded its offerings in subsequent years.
However, its Cash App has tremendously expanded its ecosystem lately. If SQ’s application to become a bank is approved, Square could affect financial services companies in the same way that Netflix (NASDAQ:NFLX) impacted video stores and cable firms.
Square also can grow tremendously overseas. It only operates in five countries and has not entered China, India, Latin America, or any European countries other than the U.K.
Despite Square’s potential, many do not think Square stock is worth buying. Bears often cite the company’s competition. The owners of Square stock do need to worry about other fintech companies. Recently, the Street has focused on the rivalry between Square’s Cash App and Paypal’s (NASDAQ:PYPL) Venmo, but SQ has other competitors.
However, the owners of Square stock shouldn’t worry too much about competition from huge tech firms. In fintech, smaller companies succeed more often than larger, better-funded rivals. The battle between Microsoft (NASDAQ:MSFT) and Intuit (NASDAQ:INTU) is a prominent example of that point. PayPal pioneered online money transfers beginning in the early 2000s. In this decade, SQ has emerged as the next great fintech company.
Square Stock Is Not That Expensive, Considering Its Growth Outlook
SQ stock is expensive, at least at first glance. Its forward price–earnings (PE) ratio stands at 70. For this reason, many investors will prefer PayPal, which is much cheaper, or payment processors such as Visa (NYSE:V) or Mastercard (NYSE:MA).
However, the valuations of fintech stocks tend to reflect estimates of their future profit increases. Analysts, on average, expect Square’s earnings to jump 66% this year and 23% in 2020.
Over the next five years, analysts, on average, expect Square’s EPS to climb 42.68% per year. No other fintech company is expected to grow its profits that quickly. While Square stock isn’t cheap, I do not think it is as expensive as it appears.
Still, in the short-term, SQ stock could rise or fall. Consequently, I do not see Square stock as a good name for short-term traders to buy.
On the other hand, over the long-term, I think the success of Cash App and Square’s move into banking will make its ecosystem dominant. As SQ expands into other parts of finance and enters developing countries, I think Square stock will climb much higher in coming years.
The Bottom Line on Square Stock
The high valuation of Square stock, as well as SQ’s competition, and the uncertainty of its banking application, make the shorter term outlook of SQ stock uncertain. However, given the longer-term potential of SQ, Square stock can jump tremendously in coming years. Put simply, SQ will prosper because it appears poised to become a comprehensive fintech ecosystem. It also has barely scratched the surface of international expansion..
History has shown that small fintech companies can win. It also shows that firms with ecosystems tend to be victorious. As SQ offers more features to more people in more countries, Square stock should rally.
As of this writing, Will Healy is long SQ stock. You can follow Will on Twitter at @HealyWriting.