Square (NYSE:SQ) is a company that could have been clobbered by the novel coronavirus pandemic. With restaurants and small businesses that make up Square’s core customer base shut down or facing restrictions through much of 2020, the company could have been hit hard. In fact, many analysts downgraded Square stock because of that risk. However, with its Cash App seeing a huge uptick in users and sellers taking less of a hit than expected, the stock defied expectations. Over the past 12 months, SQ shares have gained over 200%.
Can the good time last for SQ? Is it possible that with the arrival of vaccines, Square will see a retreat from CashApp use? Here’s what to make of this Portfolio Grader “B-rated” stock.
Square Stock Got a Huge Boost During the Pandemic
As the pandemic began to take hold in the U.S. in early 2020, there were concerns it would eat into Square’s restaurant and small business revenue. Square received multiple analyst downgrades. In May, Guggenheim downgraded Square stock. Spiking out worries about the potential low survival rates for restaurants and small businesses during shutdowns, Guggenheim analyst Jeff Cantwell wrote: “Note that Seller generates ~66% of Square’s gross profit, which means the bulk of Square’s business will be experiencing headwinds due to COVID-19.”
Since that downgrade, SQ has been on a relentless growth trajectory. Shares were trading at the $76 level at the time of the downgrade, and they are currently over $235.
The big reason for the surge in Square stock? Cash App. The company’s mobile payment app tapped into a coronavirus-fueled avoidance of cash in favor of digital payment and money transfers. Cash App is also used for digital transactions such as investing in stocks and crypto currency.
In its third quarter, Square said the number of Cash App customers using the app for a daily transaction had nearly doubled year over year. That helped drive Cash App gross profit of $385 million. That was up 212% YoY and rivalled the profit from its core Seller division.
It’s also worth noting that by Q3, Seller payment volume and profit had recovered and was on the rise once again.
What About the Vaccine?
The big question right now is the ongoing coronavirus vaccination rollout. Square Stock tripled in value during the pandemic when many considered the company at risk. With people now being vaccinated will interest wan in Cash App, resulting in the opposite effect?
First, Square has seen the worst of its Seller revenue hit. As people begin to return to restaurants, small stores and craft fairs, expect the modest growth seen in Q3 to continue through 2021. As for Cash App, all those new users Square has signed up are not going to walk away from it. Some users may use Cash App for fewer transactions, but some may use it for more. At least one analyst thinks those additional Cash app users and the number of ways they are using the app has the potential to drive Square stock to $300.
Bottom Line on Square Stock
At this point, analysts have a somewhat mixed outlook on Square stock. The Wall Street Journal is tracking 46 investment analysts and they have a consensus “Overweight” rating for SQ. However, of that group, 16 have the stock rated as a “Hold,” while three are advising their clients to sell their Square shares. They have an average 12-month price target of $234.53, which has a slight downside compared to SQ’s current price. By the way, the analyst with the $300 price target is not the most bullish — one has a $304 target for SQ.
Square has made a habit out of proving naysayers wrong over the past year. Square stock received a number of downgrades last April and again in May. SQ not only recovered in April through May, but then kicked into growth mode and posted gains of over 200% in the following months.
What to expect from Square in 2021? The stock definitely has solid long-term growth prospects, but I have my doubts that we’ll see a repeat of the past gains from the past 12 months. That kind of growth rate isn’t sustainable for a mature business. However, it is well positioned for continued — if more modest — gains.
If you’re considering adding Square stock to your portfolio, you might want to do so in the next few weeks, though. SQ has popped after the past few earnings reports and their positive surprises. There’s a good chance that will happen again when the company reports its fourth-quarter results.
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. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
