A lot of investors thought Square (NYSE:SQ) was dead in the water when the novel coronavirus came storming into the country. Why? Because as small- and medium-sized businesses (SMBs) had to close, the company’s revenue would dry up. That would crush Square stock.
Well, that was the theory anyway. While Square’s doom did indeed cripple the stock price, the pain didn’t last long. At its low in March, shares had crashed more than 60% in just three weeks. The pullback in this name was stunning, as we routinely saw 5% to 10% declines in the broader market.
However, the bull case for Square couldn’t be buried that easily.
Investors quickly identified this massive decline as a massive opportunity, seeing value in one of the market’s premier growth stocks. Square stock fell into the low-$30s amid the market’s irrationality.
Now above $200 and it’s clear that Square was a screaming buy on that decline.
What Did Investors Miss?
First, the decline was a lesson in fear-based decision making. Investors were puking up their holdings rather than adding to the high-quality ones, simply because the short-term losses had increased so much.
The other mistake? Underestimating Square’s business model. Granted, the company does cater to a lot of SMBs. While many of these locations had to temporarily close, a good portion of them found creative ways to keep the lights on (even if the doors were closed).
Restaurants shifted to take-out orders, while retailers leveraged their position in the community to stay alive. Obviously, there will be casualties in the SMBs community and that’s not good. However, Square won’t be one of them.
The company’s seller ecosystem is one part of the Square story. Last quarter, despite stressful operating conditions for SMBs, the unit delivered 12% year-over-year growth. However, let’s not forget about Square’s other services.
There’s Square Capital, which lends to businesses. Some would see this as risky, but if Square knows the company’s sales track record, loan approvals become safer. Then there’s Square Card (a business debit card) and Square Payroll.
The latter “allows employers to provide flexible and immediate wages for their employees. It typically takes two business days for payroll funds to move from an employer to their employees, which can lead to slower payouts for the more than 80 million hourly workers in the U.S.”
To counter those issues, Square launched two new products in Q3: Instant Payments and OnDemand Pay.
Ex-Caviar (which was sold), overall gross profit was up 63% in the quarter. Further, transaction-based revenue was $925 million, up 13% year over year, and transaction-based gross profit was $403 million, up 35%.
Then there’s Cash App.
Cash App Is a Crown Jewel
The company’s Cash App unit has become a generator of robust growth and increasing engagement. While Square’s overall gross profit growth was 63% (again, ex-Caviar), Cash App’s gross profit exploded more than 200% in the most recent quarter. From Square:
Cash App saw increased engagement as customers adopted multiple products: In the third quarter of 2020, the number of average daily transacting active Cash App customers nearly doubled from the same period last year.
Essentially, Square is using its Cash App to provide its customers more ways to “spend, send, store and invest their money.”
That includes investing in stocks via Cash App, as well as bitcoin. The latter helped fuel an explosion in revenue growth for the app, which climbed over 570% year over year for Q3. Ex-bitcoin, Cash App still generated solid revenue growth, up 174% year over year to $435 million. That includes more than $350 million in services and subscription revenue.
I can’t emphasize this enough: Whether it’s Square’s Cash App or its older platform, the expanding products and services will only drive more long-term growth.
The numbers here are very impressive and the economic rebound we hopefully experience in 2021 will only accelerate the company’s overall growth.
Buy the Dip in Square Stock
The bad news? The stock is up tremendously, making it hard for uninvested investors to get in. However, the good news is that Square stock has been pulling back.
The stock is working on its third straight weekly decline and fifth weekly decline in six weeks.
With the dip, Square stock is cracking below the 10-week moving average. Many use this to gauge the healthiness of the current trend. As it stands, shares are about 15% off the recent all-time high.
If we get a further decline, $200 could be in the cards. This level was support in December. However, a slightly deeper dip could send Square stock to the 100-day moving average and the $193.50 breakout level.
Anywhere in that area — from $193.50 to $200 — would be a great spot to initiate a position in Square stock, while leaving room to add to it on a further decline.
On the date of publication, Bret Kenwell did not hold (either directly or indirectly) any positions in the securities mentioned in this article.