Square (NYSE:SQ) has a number of catalysts working in its favor, particularly with the U.S. economy rebounding as America opens back up. The novel coronavirus shuttered businesses large and small, weighing on SQ stock and its peers.
So long as we avoid a second wave of Covid-19 that shuts down the U.S. again, Square should continue to run its business without too many headaches.
That’s clear in the stock price, which has come roaring back to life in recent weeks. Let’s look at a few reasons why the trend should continue in bulls’ favor and why investors should consider Square on the long side.
SQ Stock Has Growth
When the company reported its first-quarter results in early May, Square beat on revenue but missed on earnings. Sales grew about 44% year-over-year to $1.38 billion, while losing 2 cents per share, which missed estimates by 17 cents.
Really though, that’s not bad. Strong revenue can offset an obvious increase in expenses during the coronavirus outbreak, even if it was only the last few weeks of the quarter. Q2 will be rough for Square, but it’s not like revenue will completely dry up for the long term.
Analysts expect revenue of about $5.2 billion this year, and almost $6.6 billion in 2021. By 2023, estimates call for sales of more than $10 billion. It’s clear that SQ stock has growth here, even if the coronavirus will add some bumpiness to the figures.
Further, Covid-19 will impact earnings. Last year Square earned 80 cents per share. This year, that figure is expected to be just 26 cents per share. In 2021, consensus estimates are looking for a rebound up to 93 cents per share before eventually growing to more than $2 per share in fiscal 2023.
It’s worth mentioning that free cash flow (FCF) has been growing too. In 2016, FCF was near breakeven, although on the wrong side of $0. That figure has grown considerably since. Over the last three years, SQ has turned in FCF of $101.6 million, $232.3 million, and $484 million.
Revenue Diversification
The company unloaded its Caviar business to DoorDash in a $410 million deal. However, that doesn’t leave Square with just its merchant business. Instead, the Cash App business is booming.
In the most recent quarter, gross profit for the platform surged 115% year-over-year to $183 million — representing just over one-third of Square’s total gross profit. Cash App revenue of $528 million represented almost 40% of total revenue. Interestingly enough, bitcoin represented more than half of Cash App’s revenue, although just a fraction of its gross profit ($306 million and $7 million, respectively).
Still, Square’s Cash App not only helps deliver strong revenue growth, but also helps to diversify itself away from solely depending on merchant revenue. In a way, its diversification is reminiscent of PayPal (NASDAQ:PYPL), which is a complement given the way the latter has turned out.
Cash App also gives Square exposure to the cryptocurrency scene, keeping it at the forefront of future payment processes.
Square Has Strong Technicals
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Last but not least, SQ stock has a strong chart.
In February, shares were rallying into resistance in the low $80s. The stock was promptly hammered though, dropping below $35 at one point. Of course, the rebound has been fast and furious, just as it has for many stocks. Heck, the Nasdaq has already hit a new all-time high!
For now, I want to keep a few levels in mind, starting with the low $80s. Bulls will want to see this former resistance mark hold as support should we see a dip in SQ stock. As long as it’s above this area and the 10-week moving average, bulls will remain in control.
On a continued push higher, see if Square can get back to $100, which is where the stock topped out in 2018. A breakout over that could propel shares even higher.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
