Payments technology company Square (NYSE:SQ) recently reported fourth-quarter earnings. The numbers were stellar but investors still sold off SQ stock as concerns over rising rates overshadowed the strong print.
This drop in Square’s stock after great earnings is a buying opportunity, though, as fears over rising rates are both ephemeral and overstated.
They will pass.
Once they do, investors will turn their focus toward Square’s fundamentals, which are very good at the moment. When that happens, Square’s stock will rebound vigorously.
So forget the noise and buy the dip.
SQ Stock: Strong Earnings
Square’s fourth-quarter numbers were great.
Gross payment volume rose 12% year-over-year, consistent with Covid-19 era trends and reflective of an economy that’s slowly but surely reopening.
Importantly, card-not-present GPV rose 26% while omni-channel and online-only sellers now account for more than half of total seller GPV, illustrating that the company continues to successfully scale its non-physical payments processing business.
Cash App revenue soared by 413%. That’s also consistent with last quarter’s growth rate. It broadly implies that consumers continue to migrate to and heavily use Square’s digital money ecosystem.
Subscription revenue rose 60%. Adjusted EBITDA dollars rose 56%.
Those are good numbers. Actually, they’re great numbers. So why did SQ stock sell off in response? Because of something almost entirely unrelated — rising interest rates.
Forget Interest Rate Noise
The catalyst for the recent sell-off in SQ stock – a sharp rise in interest rates – is both ephemeral and overstated.
Rates are pushing higher right now because of huge fiscal and monetary stimulus. That inflationary force will continue for the foreseeable future. But it’s simultaneously fighting against much-bigger, much-more-enduring deflationary forces in automation and globalization.
That is, automated technology is capable of replacing millions of jobs today. Think language processing software automating call-centers and customer service reps. Think self-check-out kiosks automating cashiers. Think telehealth platforms automating front-desk folks at hospitals.
Technology has advanced to the point of being ready to replace millions of jobs. At the same time, thanks to Covid-19, more and more enterprises are comfortable with adopting these technologies. The result is that, over the next few years, we are going to see huge and permanent job loss in some sectors of the economy.
That’s an enormous deflationary force.
Equally as powerful is globalization, as the global geopolitical stage is now set for globalization to come back into the spotlight and for companies to more aggressively outsource labor and production – which will keep consumer prices low.
So… yes… the government is spending a bunch of money… but they almost have to spend a ton of money just to keep rates from going negative.
Long-term, we are stuck in a lower-for-longer situation when it comes to interest rates.
That’s important, because while higher rates will hurt equity valuations, my numerical analysis of the relationship between interest rates and equity valuations dating back to the 1980s found that the 10-Year Treasury yield would have to rise to 2.5% before it started to have a meaningful impact on valuations.
News flash: That isn’t going to happen anytime soon.
So, buy the dip, especially in high-quality growth stocks that have a ton of long-term earnings potential, like SQ.
Growth Outlook Remains Great
The interest rate headwind will pass. When it does, the focus will return to Square’s fundamentals. That’s a good thing for SQ stock, since the fundamentals are rock solid.
Square’s core physical payments processing business will rebound vigorously in 2021/22 as stores reopen and consumers up their spending on the back of mass Covid-19 vaccinations and a healthier employment situation.
The non-physical payments business will remain robust, too, since Square is innovatively adding new features to its omni-channel solutions — like the new interactive kitchen display system which allows restaurants to manage online, in-store, and pick-up orders, all in one place — which should help it gain share in the still expanding e-commerce pie.
Meanwhile, Cash App will remain hot. That’s because consumers are going to remain obsessed with investing (which Cash App offers), and because more and more consumers are realizing the benefits of having digital wallets. Plus, the rebound in physical spending should help boost Cash Card usage.
Big picture: Square is a relentless innovator. As a relentless innovator, the company has built of suite of products — from non-cash payment processors, to e-commerce solutions, to a digital wallet — that have huge long term earnings potential.
That’s the sort of company that will succeed regardless of where rates end up. That’s the sort of stock you want to buy on recent weakness.
Bottom Line on SQ Stock
Square stock is one of my favorite long-term investments, because of its relentless innovation which will trump most headwinds the world wants to send its way.
But it’s not my single favorite growth stock to buy today.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
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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