These are interesting times for Square (NYSE:SQ). The digital payment processing company made news by buying $50 million in bitcoin as an investment. A major bank moved to become a legitimate contender to Square stock, and another company also took a move to encroach on Square’s territory.
Meanwhile, Square has struggled to stay afloat this month, even as analysts raise their price targets with some bullish commentary.
Square is set to announce third-quarter earnings on Nov. 5, so the 11th month of the year will be just as interesting as October has been.
I’ve made no secret of my admiration of Square stock. Let’s take a closer look at Square and see if my bullish thesis holds up after the last few weeks.
Square Stock at a Glance
Just a couple of weeks ago, the Square stock price was over $190. The price action was making a case that it could challenge $200 per share. But a dip is driving Square down, putting it at less than $170.
But perspective here is important. Remember, SQ started 2020 at less than $63 per share, and its gains so far this year still clock in at 167%, even after its October swoon.
Second-quarter earnings reported in August caught the market by surprise. The company posted revenue of $1.92 billion, which was well over analysts’ expectations of $1.3 billion. Adjusted earnings per share came in at 18 cents, which topped the 11 cents EPS that Wall Street was expecting.
Some recent bullish commentary from analysts suggests that Square will have another solid report when it reports Q3 earnings on Nov. 5.
Deutsche Bank analysts Bryan Keane raised his price target for Square stock from $180 to $215. He says that Square should see 33% profit growth and continued strength in its Cash app. The analyst is expecting Q3 revenue of $1.91 billion and EPS of 15 cents.
Another analyst, Dan Dolev of Mizuho says he has a $225 price target on Square. The 8% selloff so far this month is a prime buying opportunity for investors looking to take a new position in the stock, he says in a research note.
Why Square Is Selling Off
The stock market took a dip in late October on fears that the novel coronavirus will continue to drag on the economy. But Square’s fall predates even that news.
The biggest headwinds, in what Dolev calls a “double whammy” for Square stock, came in announcements by JPMorgan Chase (NYSE:JPM) and PayPal (NASDAQ:PYPL) that are seen as giving direct competition to Square.
JPMorgan made news when it announced it is launching a new card reader that pairs with merchants’ smartphones, in addition to a payment platform it will call QuickAccept.
The idea is to get merchants to use the platform and card reader in conjunction with a new type of Chase bank business account that would have no monthly fee and provide same-day access to deposits made via QuickAccept.
The service would be a direct competitor to Square, which is best known for its plastic dongles that small merchants use attach to their smartphones or tablets to collect credit card payments.
Meanwhile, PayPal announced that it will soon allow its customers to buy and sell cryptocurrency both on the PayPal app and on Venmo, the payment processing service that allows person-to-person money transfers.
Square has been allowing its customers to buy and sell bitcoin in its Cash App since November 2017. It has been a growing revenue stream for Square stock.
In the second quarter, Square reported $875 million in bitcoin revenue and $17 million in profits from the cryptocurrency. That represented 600% increase in revenue and a 711% increase in profits on a year-over-year basis.
It’s understandable that PayPal wants a piece of that business but that doesn’t mean that Square’s interest in cryptocurrency will diminish. In fact, the company is doubling down on bitcoin by announcing a $50 million investment.
The investment represents only 1% of Square’s total assets. Think of it as a way the company is diversifying its portfolio, which isn’t a bad thing at all. If Square started taking a bigger and bigger stake in cryptocurrency, I may have concerns but a 1% hedge is fine — particularly as CEO Jack Dorsey is known to be a fan of cryptocurrencies.
The Bullish Argument
Whatever you may think about JPMorgan, PayPal or bitcoin, the core bullish drivers that make Square stock a consistent winner are still there today.
First, Square fits perfectly into how people use money today. Electronic payments in a consumer-to-business relationship are much easier when you’re dealing with credit cards than cash.
Even before the novel coronavirus, a Federal Reserve study showed that the use of cash in transactions was falling sharply. Harvard economist Kenneth Rogoff is on the record predicting that the pandemic will hasten that trend.
And don’t forget the Square Cash App. Earlier this year when Square received permission to distribute CARES Act stimulus payments, Cash App revenue grew nearly 200%. The growth trends continued in the second quarter, when the company reported gross profits up 167% on a year-over-year basis.
I’m looking for that growth story to continue Square’s Cash App competes with PayPal’s Venmo.
The Bottom Line
Earlier this year, I called Square the ideal 21st century fintech stock. I still believe that’s true.
I’m looking for solid numbers when Square reports third-quarter earnings. Square stock has an ‘A’ rating in my Portfolio Grader, where it carries a strong buy rating.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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.