Payments processor Square (NYSE:SQ) has been one of Wall Street’s top performers for several years now. Over the past five years, shares are up an impressive 2,362%. So far in 2021, though, SQ stock has been unusually quiet. Year-to-date, shares are actually down about 1%.
This recent lull in Square stock is nothing more than a golden buying opportunity.
The fundamentals underlying the company remain exceptionally robust, the valuation remains tangible, and the optics are only getting better. At the same time, the technicals imply that the stock is currently in the process of “bottoming out”.
Net net, it’s time to buy the dip in SQ stock.
Here’s a deeper look.
SQ Stock: Fundamentals Remain Strong
Square is a wide-reaching pure-play on the cashless revolution.
On one side, Square helps merchants and retailers facilitate non-cash payments. This includes giving those merchants plug-and-play payment processors that can easily and seamlessly accept card payments and digital payments. It also includes Square Online, which merchants can use on their own websites to process e-commerce payments. It also includes Square’s suite of enterprise services, like Payroll, which help business owners digitally manage their operations.
On the other side, Square helps consumers transact in non-cash payments. This is all centered around Cash App — Square’s peer-to-peer payments app with comprehensive capability that includes digitally transferring money to friends, a debit card, stock trading, and the ability to buy bitcoin.
In both worlds, Square is a power player. On the enterprise side, Square has become the de facto leader in providing payment processing services to small to medium sized businesses. On the consumer side, Cash App has morphed into a Venmo meets Robinhood app that is seeing robust adoption.
Thus, so long as consumers and businesses continue to migrate to cash, Square will remain in hypergrowth mode.
Considering cash still remains the most popular transaction medium in the world, this pivot towards a cashless society has tons of runway ahead. So does Square — and SQ stock.
Valuation is Reasonable
Thanks to powerful tailwinds from the cashless revolution and Square’s track record of innovatively expanding its business, this is a company which should easily sustain 20%-plus revenue growth not just for the next five years — but all the way into 2030, too.
Concurrently, Square operates a highly scalable software-centric business model where most of the revenue (commissions and fees) has small variable costs. Thus, so long as revenue growth continues to run at a 20%-plus clip, the company will benefit from meaningful profit margin expansion.
Accordingly, by 2030, I see Square as a $50-plus billion company with 20%-plus EBITDA margins.
Assuming so, my modeling suggests Square is on track to report about $17.50 in earnings per share in 2030. Based on a 30X forward earnings multiple and an 8.5% annual discount rate, that implies a 2021 price target for SQ stock of over $280.
Down at $220, then, SQ stock is attractively undervalued.
Optics Look Good
To everyone’s surprise, Square had an amazing 2020.
This was a company that was supposed to crumble during the pandemic. After all, it’s core business is built on the back of consumers buying things in-store, and those activities were shut down for most of last year.
Yet, thanks to Cash App, Square had its best year, ever, as consumers migrated to stock trading, bitcoin buying, and digital cash transfers and purchases.
There is some fear that the Cash App tailwind will moderate in 2020/21. It won’t. Consumers will remain digitally focused when it comes to payments, even as the physical economy reopens, because digital payments offer superior convenience and functionality. At the same time, Cash App should benefit from a recent Robinhood exodus thanks to that trading platform limiting buying orders on certain securities.
Also, in 2021, Square’s core business will rebound significantly as restaurants, retail stores, and entertainment venues gradually reopen.
In other words, 2021 could be an even better year for Square as both its consumer and enterprise businesses hit their stride. Against the backdrop of those favorable optics, SQ stock should outperform.
Technicals Imply Bottom
Thanks to its recent downtrend, SQ stock has run into some technical support recently.
Specifically, the stock hit the psychologically huge $200 level last week, showed support, and has since rebounded with vigor. That’s a great sign. It implies that there is ample buying demand for SQ stock down at $200. It also implies that this downtrend will be short-lived — and is likely on its last legs.
To that end, from a technical perspective, it appears to me as if the worst of the recent lull in SQ stock is over, and that shares are ready to kick back into their usual winning stride over the next few months.
Bottom Line on SQ Stock
Square stock is a long-term winner. Recent weakness is little more than a golden buying opportunity. Buy the dip. Hold for 2021. Shares should close the year around $300.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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