Payments technology company Square (NYSE:SQ) is set to report highly anticipated first quarter earnings after the bell on Wednesday, May 6. This will be the first time that Square — widely regarded as one of the tech companies with the most exposure to the novel coronavirus pandemic given its small business-focused client base — reports earnings amid Covid-19. How SQ stock reacts to those earnings is a very important gauge on current investor sentiment.
Will SQ stock pop back to its pre-Covid-19 highs around $80? Or give back its gains since mid-March and drop to $40?
Neither. Instead, I suspect first quarter earnings will be good enough to support the recent rally in Square stock, but not good enough to cause a rip-your-face-off rally after the print. I see shares rallying, but staying range-bound in the $60s and $70s so long as Covid-19 hangs around.
Longer term, Covid-19 headwinds will pass. Square’s underlying payment technology tailwinds will not. Thus, in the big picture, near-term weakness is a tremendous buying opportunity. SQ stock will meaningfully outperform from current levels over the next three to five years.
All in all, I say buy SQ stock. Buy more if the stock drops after earnings. Stick with the rally if the stock shoots up after earnings. Most importantly, look past the near-term noise and understand that the long-term upside potential from here is compelling.
Square Earnings May be Better Than Expected
Heading into the first quarter print, I’m cautiously optimistic that Square’s numbers will be better than expected.
Yes, Square is disproportionately exposed to economic headwinds from the coronavirus pandemic because 45% of its gross payment volume comes from merchants who have annualized volume of less than $125,000 (i.e. small businesses). The physical operations of those small businesses have been entirely shut down over the past few months, with many of them coming under significant financial stress.
But, Square already updated the market on first quarter numbers back in late March. Since then, things have only improved.
The case and death curves for Covid-19 have flattened globally. New antibody tests have shown that the virus is less deadly than originally feared. Gilead‘s (NYSE:GILD) Covid-19 treatment, remdesivir, has won emergency use approval from the FDA. Multiple massive stimulus packages aimed at small businesses have been passed. The economy has started to gradually re-open across the globe. Stocks have stabilized.
In other words, Square already gave us the really bad news at the end of March. An early May update should bring with it better news, given that the fundamentals surrounding Covid-19 have markedly improved over the past five weeks.
Still, the news won’t be great. Many of Square’s clients remain “closed.” April trends won’t be great. If management gives a second quarter guide, it won’t be great, either.
As such, the earnings report will be better than expected, but not great. That’s a combination which will support SQ stock at current levels, but not shoot it back up to $80.
SQ Stock Is a Long-Term Winner
Long-term, Square stock is a winner.
The Covid-19 crisis will pass. Once it does, consumers will get back to shopping in stores. The secular cash-to-alternative-payments transition will persist. More and more merchants, retailers, and restaurants will rely on increasingly complex payment technology to support their physical businesses.
Square offers best-in-breed solutions when it comes to payment technology for small and medium sized businesses. Consequently, over the next three to five years as cash increasingly becomes obsolete, Square’s presence across the retail world will grow exponentially. Gross payment volume will roar higher. So will sales. And profits, because this is a high-margin, commission-based business which benefits tremendously from scale.
At the same time, Square is building out a robust consumer payments ecosystem centered around its Cash App. Also as cash increasingly becomes antiquated over the next few years, more and more consumers will turn towards Cash App’s services, like person-to-person payments, the built-in debit card, and its native stock trading platform. Growth in this consumer segment will only add firepower to an already red-hot Square growth narrative.
Net net, as pure-play on the consumer and business transition away from cash, Square has a ton of long-term growth potential, the sum of which will last long after Covid-19 passes. Consequently, for long-term investors, near-term coronavirus-related weakness in SQ stock is nothing more than a buying opportunity.
Bottom Line on SQ Stock
Square’s earnings won’t be great. But the numbers will likely be better than expected, and good enough to support recent strength in SQ stock.
Going forward, shares will remain choppy so long as Covid-19 hangs around. Fortunately, Covid-19 won’t hang around forever. Once it passes, consumers will get back to shopping, the alternative physical payments revolution will resume with vigor, and Square’s sales and profits will get back on their exponential growth trajectory.
That exponential growth trajectory will drive SQ stock significantly higher in the long run. Buyers here amid the chop will be handsomely rewarded.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SQ.