When it comes to fintech stocks, payment processing company Square (NYSE: SQ) has been a disappointment as of late. While the S&P 500 index rose 22% over the last 12 months, SQ stock rose only 6.5% in comparison.
And that lags far behind other stocks in the fintech/payments arena:
- Shopify (NYSE: SHOP), up 190.4%.
- Mastercard (NYSE: MA), up 57%.
- Visa (NYSE: V), up 48.9%.
- PayPal Holdings (NASDAQ: PYPL), up 14.9%.
Happily, Square is off to a great start in 2020, bouncing 19% higher on the strength of a couple key analyst upgrades.
The company’s next earnings report isn’t until late February, so there is plenty of time for sentiment to build before the payment processing company posts it updated outlook.
On average, analysts are expecting earnings per share of 21 cents for the quarter, which would be up from 14 cents a year ago. For 2020, analysts are expecting earnings of 95 cents per share, up from an expected 2019 full-year EPS of 78 cents.
Why SQ Stock is a Gem
The secret of Square is the brilliant way it mixes tried-and-true habits with 21st century technology. Today’s customers are already conditioned to carry their credit or debit cards everywhere and many people prefer the convenience of plastic to cash.
Square capitalizes on those spending habits. The company’s small, plastic dongles fit in cell phones and tablets, turning them into instant payment processing systems.
And because Square accounts can be activated in just minutes, instant credit and debit card payments can be accepted by a whole new world of vendors or with a side hustle — cookie-selling Girl Scouts, food truck operators, dog walkers and babysitters can all get money in a snap.
That convenience provides a great foundation for growth — and Square is taking advantage.
“Square’s negative narratives and present valuation belie the company’s fantastic underlying financials. The company has been growing their revenues at upward of 40% year-over-year for the last five years, and despite calls for competition destroying their business, gross margins have been improving. For a company that allegedly operates in an ultra-competitive space, their 40% gross margins are sure curious.
“Square’s present sales growth rate of 40+% year-over-year and 40% gross margins, along with stable, growing free cash flow, are being vastly undervalued relative to the company’s peers.”
Looking at the Bear Case
Wait … what was that about “negative narratives?”
No doubt, you can find something bad to say about any stock on the market. A large part of investing, after all, involves people betting on stocks or against stocks, so Square stock bears are always looking for a reason to preach caution.
In Square’s case, you have CEO Jack Dorsey’s plan to live — for at least six month — in Africa, a continent that he says will “define the future.” And while getting in on the ground floor of any developing market is exciting, skeptics such as Jeff Sonnenfeld of Yale University calls it “reckless.” Others wonder who will be handling day-to-day operations at Square while Dorsey is on the other side of the world.
Experts such as Mott Capital Management also note that Square has a history of outperforming earnings, but sets a low bar on guidance that has historically depressed the stock.
“Additionally, analysts have been trimming their earnings estimates for the company in 2020 and 2021. Since the beginning of 2019, analysts’ earnings estimates have declined by 13% and 25%, respectively. That has brought forecasts for 2020 down to just 96 cents per share and $1.34 per share in 2021.”
It’s a fair point. Square already boasts a steep valuation with a forward P/E of 80 and a price-book ratio of 26. If Square can hit its earnings marks and post solid 2020 guidance, the stock price will respond.
Bottom Line on Square Stock
There’s no reason to expect that Dorsey and Co. will deviate from what’s worked for Square stock so far. Expect a solid earnings report and conservative guidance for 2020 when SQ reports in February.
For the long term, SQ is a great stock to own. The company has a solid business model that marries the gig economy to tried-and-true consumer spending patterns, good leadership and a promising track record of growth.
SQ may not blow you out of the water, but it’s a good fintech stock to hold in the 2020s.
As of this writing, Patrick Sanders did not hold a position in any of the aforementioned securities.