Why Square Stock Is a Buy on Coronavirus Selloff

Square has obvious exposure to small- and midsize businesses, but there's more to the story than that.

Square (NYSE:SQ) has taken a nasty tumble, as SQ stock fell 54% from peak to trough in about one month’s time.

Why SQ Stock Is a Buy on Coronavirus Selloff
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However, shares have already bounced another 38% from the lows. The volatility here has been intense, and it leaves investors worried about what’s to come. While the bounce is definitely a positive, it still leaves Square down about 36% from the February highs.

So. what’s going on?

Impact From the Coronavirus

Businesses across the nation are boarding up, hopefully temporarily, as the coronavirus from China pandemic spreads. That said, the impact is two-fold for Square. Many small and midsize businesses (SMBs) use Square as their payment platform. When these businesses close up shop, even temporarily, it hurts Square as sales cease for these locations.

The other side of that coin is that employment is set to take a hit. When employees lose their jobs, they lose their spending power. Just look at the most recent jobless claims data, which came in at more than 3.2 million — almost double economists’ expectations.

Combine these lost wages with widespread fear and social distancing, and even the businesses that are open are struggling. It’s not a good fit for a company like Square, which thrives off of SMBs.

Guidance & Stimulus

However, just because SMBs are getting thrashed doesn’t mean SQ stock is left for dead.

First, management lowered its first-quarter guidance from a prior range of $1.34 billion to $1.36 billion, to $1.3 billion to $1.34 billion. Management did say it expects a net loss per share for the quarter vs. prior expectations for profit of 16 to 18 cents per share.

Still, these numbers are not that bad given what we’re seeing pan out in the real world at the moment. It suggests that, perhaps the hit to Square’s business isn’t as bad as feared.

A slight reduction in revenue and a hit to earnings for a company that thrives more on growth than on a robust bottom-line is certainly encouraging. The second quarter will be concerning, though, as it’s unknown how long these lockdowns will last. Additionally, another unknown becomes the full-year results, as management pulled its prior outlook amid the uncertainty.

On the plus side, the stimulus bill will look to distribute cash across the nation and pump money into businesses around the U.S. Make no mistake, this will not make the problem go away. But if Congress and the Fed can put together an effective Band-Aid on America’s SMBs and corporations until the coronavirus blows over, we could see a sharp recovery.

A Closer Look at SQ Stock

For the first quarter, it looks like SQ stock will be rather resilient as it relates to struggling SMBs. The outlook is muddy over the next quarter, but there’s more to Square than that. For instance, the company’s Cash App is driving some serious growth.

Last quarter, Square reported that Cash App revenue was up 147% to $361 million, and up 96% when excluding bitcoin. In other words, total Cash App sales made up more than 58% of total sales in the fourth quarter.

In management’s latest update, the company said the impact on gross profit in the Seller ecosystem was more pronounced than the impact on gross profit for Cash App. By the way, gross profit for the former grew “just” 27% year-over-year in January and February, while gross profit surged 104% in the same period for Cash App.

Beyond that, Square is a play on the shift to a cashless society. That’s as credit and debit cards replace cash and check — a secular theme that continues to gain momentum. It’s also a play on cryptocurrencies.

So when investors think of SQ stock only as the payment platform for SMBs, realize that there is more to the business than that. A 54% one-month decline in the share price was an overreaction, even if there is uncertainty about business in the second quarter and beyond.

The Bottom Line

For a company like Walmart (NYSE:WMT) or Amazon (NASDAQ:AMZN), we can safely assume that sales will see a positive impact. For Square, the coronavirus will clearly have a negative impact and it’s hard to gauge to what extent that will be. That makes valuing the stock difficult.

While this year’s numbers will take a hit, we know that SQ stock is growing revenue, earnings and free cash flow — the latter two of which are in positive territory. In a way, it reminds me of Advanced Micro Devices (NASDAQ:AMD), which sank on a temporary disruption from the swoon in cryptocurrencies. Ultimately, this too shall pass.

Although COVID-19 will have a negative short-term impact, a huge haircut in SQ stock gives long-term investors an opportunity. That is, unless you think the world is ending, which historically speaking, is off the table for now.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/03/buy-square-sq-stock-coronavirus-selloff/.

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