Square (NYSE:SQ) is a company that has seen parts of its business challenged by the pandemic, while other parts thrived. Lockdowns closed many small businesses, impacting the company’s point-of-sale payment processing. Events like craft shows have been cancelled, cutting into the revenue generated by Square’s popular smartphone card readers. At the same time, the reluctance to handle cash has driven up adoption and use of Square’s Cash app. The net result has been a big win for SQ shareholders, with Square stock up 254% so far in 2020.
SQ earns an “A” rating in Portfolio Grader. It’s in a strong position. But with Square stock posting that kind of growth in 2020, is it now overvalued?
I think there is more growth ahead for this innovative financial services company, and I suspect its Cash app is coming into its own to lead the charge.
Square’s Q3 Beats Estimates, Cash App Shines
In November, Square reported its third-quarter earnings. Both revenue and earnings absolutely blew past Wall Street estimates. Revenue of $3.03 billion was up 138.6% year-over-year and trounced estimates of $2.04 billion. Square delivered adjusted earnings per share of 24 cents. That’s up 36% compared to last year, and more than double the EPS of 16 cents that had been expected.
The star of the show among those results was the Cash app, Square’s peer-to-peer mobile app that allows users to send and receive money.
The gross profit from merchants using Square’s payment services has seen little growth through 2020. It actually shrank by 9% in Q2, but in Q3 managed 12% YoY growth to hit $409 million.
On the other hand, gross profit from the Cash app has posted triple-digit growth in every quarter this year. In Q3, it was up 212% YoY. At $385 million, it has almost caught up to the gross profit generated by merchants/sellers. To put that in perspective, in Q3 2019, Cash app gross profit was $123 million — roughly one third of the gross profit generated by merchants/sellers.
With those kind of numbers, it’s no wonder Square stock immediately popped 13%.
Cashing in on an Increasingly Cashless Society
Square’s merchant/seller business will rebound when the pandemic is behind us. But I don’t think that that huge growth in Cash app use is going to peter out.
Before the pandemic, we were already talking about the growing movement toward a cashless society. Last December, Harvard marketing professor Shelle Santana pondered what would happen in 2020:
Those opportunities where you can opt not to use cash I think will increase. The question is whether there will be an increase in where you are prevented from using cash. … That’s the interesting dynamic to watch in 2020.
That turned out to be a prescient statement. The pandemic — and a reluctance by consumers and retailers to handle cash — have accelerated the cashless trend. Square’s Cash app has benefited tremendously from that effect. However, it seems unlikely Cash app users will stop using it once the risk of COVID-19 is deemed over.
The episode has raised awareness about just how dirty money can be. Using an app is easier, and users don’t need to worry about losing money (or having it stolen). Square Cash app usage is here to stay.
Bottom Line on Square Stock
Square stock has been a stellar performer in 2020, frequently exceeding analyst expectations. For example, at the end of September (with SQ nearing $165), Wolfe Research analyst Darrin Peller upgraded Square to “outperform.” He raised his price target from $166 to $195. Here we are, just under three months later, and SQ is closing on $242.
At the moment, the 44 investment analysts being tracked by the Wall Street Journal give SQ a consensus “overweight” rating. However, their average 12-month price target of $216.48 is well below the stock’s current trading price.
Why would you consider investing in Square stock when analyst price targets currently have a 10% downside? Look no further than the example above. Or how soundly the company trounced Wall Street’s Q3 projections.
Square is proving adept at outperforming expectations. I’ll let the company have the last word about what the future holds, and why I remain optimistic about Square’s prospects:
Our results in the third quarter highlight our ability to reach new customers as we drove strong acquisition across both Seller and Cash App. While the macroeconomic environment remains uncertain, we continue to believe that our Seller and Cash App ecosystems are well-positioned to benefit from the acceleration of secular shifts, such as omnichannel commerce, contactless payments, and digital wallets for consumers.
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.
