The novel coronavirus pandemic has had a catastrophic effect on the retail sector. Lockdowns, and closed shops have dealt lasting damage. However, as the country begins to emerge from those lockdowns, it’s clear there are some retail players that have fared better. And some are positioned to profit immensely from the new reality. Electronic payments company Square (NYSE:SQ) is one of those. Trading near the $95 level, Square stock is up 48% so far this year and closing rapidly on its all-time high.
Square is one of the best stocks to own to take advantage of the changing retail and personal finance spaces.
Square’s Q1 Earnings
Shopify (NYSE:SHOP) tends to dominate the headlines when it comes to small retailers and online sales. Given Shopify’s performance in 2020 and the scramble by independent shops to move online during the coronavirus lockdown, that’s understandable.
Square’s first quarter earnings show that it has also performed better than many had expected during the coronavirus pandemic. The company posted a loss of 2 cents per share instead of the 13 cents per share gain that had been expected and Gross Payment Volume (GPV) grew more slowly than hoped. The results disappointed many analysts, but things could have been much worse.
In fact, despite the fact that coronavirus lockdown savaged retail sales in the last two weeks of March, Square still posted some impressive gains. Revenue for the quarter was up 44% year over year. GPV was up 14% YOY. Gross profit was up 36% YOY
Also in that earnings report were several notable points that bode well for future growth.
Cash App — the company’s competitor to PayPal’s (NASDQ:PYPL) Venmo — added its largest ever number of net new customers in March. Many Cash App customers used the service to direct deposit their tax refund and CARES Act stimulus payments. That helped April to set a record for the number of Cash App direct deposits. Square says the money sitting in those Cash App accounts drove a corresponding rise in spending and peer-to-peer payments. Cash App revenue was up a whopping 98% YOY.
Square also offers an online retail solution with Square Online Store, which competes with Shopify. And in Q1, Square Online Store saw a burst of new sign-ups. The company reported that after launching local delivery and curbside pickup options, the GPV for this business increased by five times. Square Online Store is no threat to Amazon (NASDAQ:AMZN), but growing its own network of e-commerce retailers is a plus as consumers increasingly shop online.
Square Capital continued to grow its small business loan portfolio. Approximately 75,000 loans were facilitated during the quarter with a total value of $548 million. That’s an increase of 8% YOY.
Despite that uptick in Square Online Store adoption, the company grew its percentage of GPV generated by large retailers. Those with annual GPV of $500K or larger grew from 23% in Q1 2019 to 25%, while those with under $125K in GPV dropped from 49% to 48%. This shift to adoption by larger retailers is a good sign. It provides more protection against the effects of an extended coronavirus-fueled slowdown, which will take a toll on “mom and pop” operations. More large retailers adopting Square payment also shows the company is making gains into stores that previously accepted only credit cards.
Bottom Line on Square Stock
An investment in Square is not without risk — no stock is without risk. In May, Bank of America downgraded Square to underperform. Analysts were concerned that the small and medium-sized businesses (such as restaurants, salons, and retailers) that still make up the lion’s share of Square’s payment volume remain on shaky ground. If these customers stumble during the reopening and fail, that will hurt Square. With COVID-19 cases spiking in some states that have reopened, and worries about a second wave in the fall, that’s a valid concern.
However, that potential downside is largely offset by points that are in Square’s favor. Even during a pandemic, it reported payment volume up YOY. It is having success in winning over larger, more stable, retail customers. The company’s Square Capital loan business is increasing. Use of its Cash app is growing at a rapid pace, and that’s not going to slow any time soon with consumers increasingly wary of handling actual money.
Square hit an all-time record high close of $98.01 on September 28, 2018. With its current momentum, that record is well within reach for Square stock. The risks associated with the pandemic push Square to a ‘B’ grade in my Portfolio Grader. However the many positives, the 48% growth so far in 2020, and trends that support its business model (like a move away from cash) mean Square stock still carries a buy rating.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.