SQ Stock: Down 15% From Record Highs, Is Square a Buy?

Author: Finscreener

Estimated read time: 3 minutes

Publication date: 5th Oct 2021 12:23 GMT+1

High-flying growth stocks in the technology space have crushed the broader markets by a significant margin, since the financial crisis of 2009. The elongated bull run despite the bear market of 2020 has been fueled by a low-interest-rate environment that has allowed enterprises access to cheap capital to fund their expansion plans.

But, the ongoing volatility in equity markets has resulted in a pullback in tech stocks such as Square (NYSE: SQ). This fintech giant is currently trading 15% below its all-time high allowing investors to buy the dip. Let’s see if Square stock should be part of your portfolio today.


Square’s gross payment volume is expected to touch $140 billion in 2021

Square has gained massive traction over the years by rapidly expanding its seller ecosystem. Its point-of-sale solutions also include data analytics, loans, and other products to help small and medium enterprises expand their business.

Square’s gross payment volume or GPV stood at just $6.5 billion in 2012 and grew to $106 billion in 2019. In 2021, it remains on track to surpass $140 billion in GPV this year. The company has successfully onboarded larger companies on its platform and in the second quarter, enterprises generating over $125,000 in annualized GPV accounted for 65% of total volume. 

In the same period in 2019, this figure stood at 55%. 

Square’s point-of-sale solutions primarily derive revenue from merchant fees and the emergence of larger businesses should positively impact gross margins in the upcoming quarters.


What next for SQ stock?

Square’s revenue has increased from $2.21 billion in 2017 to $9.5 billion in 2020, indicating an annual growth rate of 62.6%. Analysts now expect sales to double year over year to $19.11 billion in 2021 and increase by 12.5% to $21.5 billion in 2022. Comparatively, its adjusted earnings per share are forecast to rise from $0.84 in 2020 to $2.38 in 2022.

A key driver of Square’s revenue growth will be the Cash App which is a peer-to-peer payment platform. Between 2017 and 2020, Cash App has seen its monthly active users rise from 7 million to 36 million, consistently outpacing rivals such as Venmo. Cash App has targeted younger users to grow its customer base.

In addition to merchant fees, this payment platform derives revenue from bank transfers as well as investments. You can easily purchase or sell Bitcoin on the Cash App which is the largest cryptocurrency in the world.

The pending acquisition of buy now pay later or BNPL company Afterpay will also help Square accelerate revenue growth, once the deal is closed. The buyout will also allow the company to expand the Cash App ecosystem that currently generates $55 in gross profit for each user. Comparatively, it spends just $5 to acquire a new user.


Square valuation and more

SQ stock has returned a staggering 1,730% to investors since its IPO six years back. It’s currently valued at a market cap of $104 billion indicating a forward price to 2021 sales multiple of 5.4x and a price to earnings multiple of 120x which might seem expensive. However, the company’s stellar growth estimates demand a premium valuation.

Square ended the June quarter with a cash balance of $5.6 billion and $6.13 billion in debt. In order to fund the $29 billion acquisition of Afterpay, Square will have to raise capital in the form of equity or debt, impacting its robust balance sheet.

But Square will also onboard 16 million customers into its already expanding ecosystem allowing the fintech heavyweight to cross-sell additional solutions. Afterpay will be highly accretive to Square’s top-line and the company derived $506 million in gross profits, which rose 96% year over year.

SQ stock has easily outpaced the S&P 500 since its IPO in late 2015 and is positioned to continue its stellar run in Q4 of 2021 and beyond.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.