The long-term bulls in Square (NYSE:SQ) are finally seeing their investments pay off. Square stock has taken its time, but 2020 has been a robust year for shares. (The stock is up 168% so far).Over the past year, the stock is up roughly the same amount.
Some say the stock has run too far, too fast. I say, it’s about time the stock has got a move on.
Admittedly, Square stock — like any stock — is susceptible to market forces. If the S&P 500 and Nasdaq come under pressure, you know what? Square probably will too. But that’s OK. Dips after a rally are a good thing; corrections are healthy. They give investors an opportunity to buy, as shares consolidate the gains.
A Play on the Future
I keep hearing this one fear: If the U.S. goes into lockdown again, Square’s revenue is going to dry up.
Admittedly, revenue will take a hit as transactions at businesses running Square will take a hit. But as we saw in March and April of this year, Square’s business model did not plummet.
First, e-commerce sales are booming. While many transactions are made over a website or platform’s checkout process, Square can handle online sales. Second, many of its customers are small- and medium-sized businesses. These companies and restaurants are adapting to the novel coronavirus and offering pickup and delivery options — even during some lockdowns.
Finally, Square has exposure to bitcoin, the price of which is booming. Bitcoin is at its highest price since June 2019 and has had plenty of momentum lately. For Square, its Cash App (which bitcoin is a part of) is driving growth right now.
Some investors will point out the lack of gross profit from its cryptocurrency unit. That’s true. However, I believe there are times to forgo profit in exchange for revenue growth. For Square stock, this is one of those times.
While more platforms entering the bitcoin mix might seem like a negative for Square’s Cash App, it’s actually a huge positive. As awareness of bitcoin climbs and as more consumers become comfortable with it, the higher the price can go.
That’s music to Cash App’s and investors’ ears.
Square Stock Continues to Improve
Square stock should have been an M&A target years ago. Like many of today’s great growth stories though, big firms didn’t want to pay up for these rising stars. They argued that the valuations are too high, the financials too poor and the tangible addressable markets too small.
At least, that’s what they told themselves to justify taking a pass on companies like Square. Unfortunately for them, a traditional banking firm missed out on a great entity. Fortunately for investors, they got to ride Square to new highs.
The stock has seen surging free cash flow growth over the years and once Covid-19 is behind us, I expect that growth to resume. But here’s why I think Square stock will be more than fine through the pandemic. From the company’s fiscal second quarter, which are the three months ending on June 30: “In the second quarter of 2020, total net revenue was $1.92 billion, up 64% year over year, and excluding bitcoin revenue, total net revenue was $1.05 billion, flat year over year.”
Many will read that and ask, “flat growth ex-bitcoin?” They view it as a negative; a growth company with no growth.
I’ll take the other side of that coin. First of all, Square does have revenue growth, because of bitcoin and its Cash App. Further, the latter generated gross income of $281 million in the quarter, up 167% year over year. That’s almost half of the company’s entire gross profit for the quarter.
Second, I think it’s very impressive that Square had flat growth ex-bitcoin for the collective months of April, May and June. Those will likely be some of the most difficult months most companies ever faced — and Square squeaked out with flat growth. I love it.
For now, Square stock continues to trend higher. If it pulls back further, that creates an opportunity. Remember, stocks don’t go up in a straight line. Declines exist for investors to buy.
On the date of publication, neither Matt McCall 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.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.