Here’s a simple truth about shares of payments processor Square (NYSE:SQ): as go Square’s adjusted revenue growth rates, so goes Square stock.
For most of 2016, Square’s adjusted revenue growth rates were consistently decelerating quarter-over-quarter. As they did, Square stock went nowhere. Then, in the first quarter of 2017, Square’s adjusted revenue growth rate bottomed at 39%. Over the next six quarters, Square’s adjusted revenue growth consistently accelerated quarter-over-quarter, topping out at 68% in the third quarter of 2018. Over that stretch of adjusted revenue growth acceleration, Square stock went from $10 to $100.
Then, adjusted revenue growth rates started decelerating again. From the third quarter of 2018 to the third quarter of 2019, Square’s adjusted revenue growth rate steadily dropped from 68% to 40%. As it has, Square stock has dropped from $100 to $60.
Now, heading into 2020, it looks like Square’s adjusted revenue growth rates are set to stabilize and potentially even move higher, thanks to broader economic tailwinds, easing competitive headwinds, and new product growth. As those growth rates do stabilize, Square stock will head higher.
How much higher? My numbers peg $80-plus price tags as doable for SQ stock in 2020. That represents about 30% upside from current levels, and that’s simply too much upside potential to pass up on.
Consequently, Square stock is one of my favorite growth stocks for 2020.
Square’s Growth Rates Will Improve
As go Square’s adjusted revenue growth rates, so goes Square stock. Fortunately for bulls, Square’s adjusted revenue growth rates are set to improve in 2020 thanks to three big tailwinds.
First, broader economic tailwinds will emerge in 2020. That is, escalating U.S.-China trade tensions weighed on global economic activity in 2019, and curtailed consumer spending trends. In 2020, those escalating trade tensions, will de-escalate. As they do, global economic activity will pick back up. So will consumer spending. Because payment cards are the choice transaction method of consumers globally — and because Square is one of the biggest payment card processors in the world — re-accelerated consumer spending will naturally translate into revenue tailwinds for Square.
Second, competition headwinds will ease. Throughout 2019, Square has been trying hard to branch out of its small-to-medium sized business (SMB) focus and on-board bigger retailers and merchants. Doing so has caused Square to more aggressively rub elbows with competitors. This elbow rubbing will ease in 2020, because Square is now gaining traction in the Big Retail world, with gross payment volume (GPV) from mid-market sellers (annual GPV in excess of $500,000) growing 44% year-over-year last quarter to 27% of total GPV. The bigger Square gets in the Big Retail world, the less competition headwinds will weigh on the company. So, heading into 2020, these competition headwinds should cool off, thereby providing a lift to revenue growth.
Third, new products will turn into meaningful revenue contributors. The big one here is Cash App, which is Square’s person-to-person (P2P) payment app that is gaining significant traction in the mobile P2P world. The introduction of fractional stock-trading will propel Cash App to gain mainstream traction in 2020, and that will turn this formerly niche service into a meaningful revenue generator. At the same time, other ancillary services like Online Store will also gain traction and add revenue firepower.
Square Stock Can Take Out $80
As Square’s adjusted revenue growth rates improve in 2020, Square stock will rally towards and above $80.
Taking a step back, Square has turned into the payment infrastructure backbone for SMBs everywhere. That is, Square has built an ecosystem of services and tools surrounding its core payment processing machines, the sum of which have become invaluable pieces of the selling equation for SMBs. Now, they are taking those tools, and more aggressively selling them to bigger retailers, with great success. As such, Square appears to be in the process of turning into the payment infrastructure backbone for a much larger piece of the retail pie than just the SMB slice.
Naturally, this trend — coupled with the fact that payment cards are the future payment method of choice, and Square is a payment card processor — means that the percent of total retail sales that go through the Square ecosystem will grow over time. Indeed, this has already been happening. Square’s share of total retail sales, as judged by GPV, has grown from 0.23% in 2016, to a projected 0.42% in 2019.
This share expansion will persist. As it does, Square will sustain big payment volume and revenue growth at scale for a lot longer. Profit margins will also keep running higher, supported by the fact this is is a high gross margin business with significant room for positive operating leverage through sustained big revenue growth.
Ultimately, my modeling suggests that Square can hit about $4 in earnings per share by 2025. The price-earnings ratios of mature payment companies, like Visa (NYSE:V) and Mastercard (NYSE:MA), hover around 30. Assuming that same exit multiple and a 10% annual discount, that equates to a 2020 price target for Square stock of over $80.
Bottom Line on SQ Stock
Square stock is a long-term winner that went through a rough patch in 2018/19 as adjusted revenue growth rates faltered under macroeconomic and competitive pressures. But, those pressures will ease significantly in 2020. As they do, the company’s adjusted revenue growth trajectory will improve.
Historically, this improvement has led to big rallies in Square stock. Calendar 2020 won’t be an exception. By the end of next year, Square stock will likely be hovering north of $80.
As of this writing, Luke Lango was long SQ.
