Somewhat counter-intuitively, Square (NYSE:SQ) has surged higher in 2020 amid a global pandemic which, for several months, entirely shutdown small-to-medium sized businesses across the globe, from which Square derives most of its revenue. Despite that ostensibly huge headwind, Square stock is up more than 65% year-to-date.
Why? One word: innovation.
Long story short, Square has consistently and tirelessly innovated across its entire ecosystem during the Covid-19 pandemic. This innovation has both allowed the company to support healthy growth trends amid a global economic shutdown, while simultaneously positioning the company for sustained rampant growth once the pandemic ends.
In other words, despite an economy-killing pandemic, Square has leveraged innovation to both shore up its near-term growth prospects and improve its long-term growth prospects.
This innovation underscores why you want to hold onto SQ stock for the long haul. At the same time, though, valuation risks on Square stock are large with shares up above $100. So, as opposed to rushing buy into this rally, I’d wait for it cool off, and buy on the next dip.
Here’s a deeper look.
Innovation and Square Stock
Square’s ability to innovate its way through the Covid-19 pandemic — and likely come out the other side a stronger company than it was coming into the pandemic — underscores why you want to own SQ stock for the next five to ten years.
In essence, Covid-19 was supposed to kill Square. The company is built on the back of consumer-facing, small-to-medium sized businesses across the globe, like local restaurants, retail shops and bakeries. Those businesses were entirely shut down throughout most of March, April and May. Square’s growth trends were supposed to fall off a cliff during those months, too.
But they didn’t.
Revenues in the first quarter of 2020 still rose 44% year-over-year — despite a steep drop-off in physical transaction volumes — because of record Cash App engagement growth as consumers pivoted towards peer-to-peer digital payments, a surge in Square Online Store payment volume and increased bitcoin trading volume.
In other words, Square’s new and innovative ancillary businesses offset weakness in its core physical payments business to steady the ship during the Covid-19 pandemic.
Long-Term Strength
These innovations which helped Square survive a pandemic are only accelerating.
In May, Square launched Online Checkout, an online checkout link or button that allows retailers to accept online payments without having to build an online store. Square followed that up in June by launching On-Demand Delivery, which allows its online sellers to send packages through delivery partners, like Postmates.
All the while, Square has continued to build out the Cash App ecosystem to be a more legitimate substitute for traditional banking.
Zooming out, all the innovation that Square has done over the past few months — and indeed, over the past few years — underscores one very obvious truth about this company: Square is increasingly turning into a platform for non-cash payments of all sorts.
That includes physical non-cash payments. Digital non-cash payments. B2C non-cash payments. P2P non-cash payments. All non-cash payments.
To that end, SQ stock is increasingly turning into a pure-play on the non-cash payments megatrend. That trend will only gain momentum in the long run, as cash becomes antiquated and consumers more consistently pay with cards or e-payment methods.
As all that happens, SQ stock will power higher.
Valuation on Square Stock is Extended
Although I love Square stock in the long-run, I’m also aware that the valuation on shares is extended here and now.
My long-term model assumes that Square ride secular non-cash payment tailwinds to 15%+ revenue growth over the next decade, and that scalability drives adjusted EBITDA margins from below 9% in 2019, to 20% by 2030.
Those are realistic yet aggressive growth assumptions. Even under those optimistic assumptions, my 2030 earnings per share target for Square is $9, which using a 25-times forward earnings multiple and a 10% annual discount rate, equates to a 2020 price target for SQ stock of $95.
As such, at levels above $100, SQ stock is slightly overvalued.
Bottom Line on SQ Stock
Square stock is a long-term winner. The company’s ability to innovate its way through a pandemic is evidence of that. You want to own SQ stock for the long hual.
Still, price matters, and above $100, the SQ stock price is just too high. Let the stock cool off. Let the price come down. Then buy the dip.
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.
