Since July, Square (NYSE:SQ) stock has been under lots of selling pressure, despite the bull move of the stock markets. Since July, Square stock has dropped about 20% to $65, and SQ stock has only risen 15.5% this year. By comparison, Visa (NYSE:V) clocked a gain of 41% and PayPal (NASDAQ:PYPL) is up about 29%.
There are a couple of nagging issues for SQ. First of all, its growth is decelerating. Over the past two quarters, its gross payment volume has climbed about 25%. But in the same quarters of 2018, its GMV rose 30%.
And it looks like the deceleration will continue. Next year, its revenue is expected to rise just over 30%, down from a 46% gain this year.
Further, competition is heating up in the payments space. The fact is that mature financial operators like JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are retooling their offerings. For the most part, they realize they need to push the boundaries of innovation. But these giant financial institutions also have some key advantages, such as strong brands, large customer bases and multiple revenue streams. In the meantime, mega tech operators like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and even Facebook (NASDAQ:FB) are investing heavily in the category.
And finally, there have been some concerns about the leadership of Square CEO Jack Dorsey. That was particularly the case when he went on Twitter (NYSE:TWTR) and indicated he was thinking of moving to Africa next year for up to six months! That caught everyone off guard, and Square stock took a hit. Also concerning to investors was the fact that Dorsey did not identify an interim leader who could manage the business in his absence.
A Look at 2020
Granted, even after the recent decline of Square stock, its valuation is still far from cheap. Consider that its forward price-earnings multiple is 68.
But despite that, I still think the bull case on SQ stock looks fairly reasonable. It’s true that Dorsey should have provided more details about his plans surrounding his potential Africa trip. But then again, his willingness to take the time to understand a new market is encouraging. It shows that he is focused on the long-term outlook of SQ.
Even though Africa has its problems, the continent still has much promise. It has a population of more than 1.2 billion and its GDP growth is projected to average nearly 6% annually from 2018 to 2023. Currently, the continent has about 355 million members of the middle class. But by 2060, that number could reach 1.1 billion. And a majority of people in Africa already have smartphones.
In other words, mobile payments can grow rapidly in Africa, making the continent extremely promising for Square.
The Bottom Line on Square Stock
Square’s growth has been decelerating. But that is to be expected, since its revenue is much higher now than in prior years. Besides, its revenue growth is still impressive – and it should continue to be for some time as Dorsey aggressively moves into foreign markets.
Also helping boost Square’s top-line outlook is his addition of new revenue streams, such as online lending services, marketing automation, inventory management, loyalty programs, invoicing, etc. What’s more, Square continues to be innovative, as shown by the huge success of its relatively new Cash App. Dorsey has also been quick to recognize his mistakes; for example, he sold the company’s Caviar delivery service.
Again, the valuation of SQ stock is certainly on the high side. But Square stock definitely deserves a premium for its strong platform. More importantly, as Dorsey’s efforts in overseas markets begin to take hold. Square’s growth may still beat expectations.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
