Why This Move Could Translate into Big Gains for Square Stock

Why This Move Could Translate into Big Gains for Square Stock
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Square Inc Launches a Game-Changing Service

Global retail e-commerce sales were $2.3 trillion in 2017, and they will continue to grow as more countries—especially those in emerging markets—jump online.

The demand for digital payment solutions will also increase because buyers and sellers need reliable platforms on which to clear transactions, regardless of location.

There are numerous mobile payment platforms, ranging from small emerging players to mega-cap companies.

One of my favorite large-cap stocks in the mobile payment space is Square Inc (NYSE:SQ), which traded at a record $101.15 on October 1, 2018.

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But given the recent selling in the tech sector and the broader stock market, SQ stock traded down to the $50.00 level during the December 2018 carnage, prior to staging an impressive 40% rally to its current level.

A year ago, SQ stock was hovering around $37.00. With a beta of around 3.90, traders need to have a strong stomach when considering Square stock.

Yet, for those with patience and a longer-term perspective, Square Inc has tremendous potential in the global mobile payment space.

CEO and co-founder Jack Dorsey has done a great job of transforming Square Inc from a provider of mobile payment solutions to a growing provider of financial services to small businesses.

Square Inc already has a billion-dollar small-business loan division, and the company is now in the process of introducing a free “Mastercard” debit card for small businesses to manage their critical cash flows.

This game-changing move will allow merchants to immediately use funds processed via Square Inc’s mobile payment system. This comes in handy if a merchant needs funds to pay for something like inventory or a marketing campaign.

On the stock chart, SQ stock is volatile and is facing some resistance around $78.00. A failure to break above that price could see Square stock retrench below $60.00, which would present an opportunity for investors.

Chart courtesy of  StockCharts.com

Strong Growth Supports High Valuation for SQ Stock

Square Inc is a good representation of a technology growth stock.

Revenue has increased by 300% from 2013 to 2017, with four straight years of strong growth. The compound annual growth rate (CAGR) during that time frame was an impressive 41.5%.

Fiscal Year

Revenue (Millions) Growth
2013

$552.4

2014

$850.2 53.9%
2015 $1,270

49.0%

2016

$1,710 34.9%
2017 $2,210

29.6%

(Source: “Square Inc. Cl A,” MarketWatch, last accessed January 25, 2019.)

Square Inc also managed to narrow its earnings before interest, taxes, depreciation, and amortization (EBITDA) losses in 2015 and 2016, prior to recording a positive EBITDA in 2017.

Fiscal Year

EBITDA (Millions)

Growth

2013

-$78.7
2014 -$107.3

-36.4%

2015

-$92.2 14.1%
2016 -$81.5

11.7%

2017

$50.1

161.5%

(Source: Ibid.)

The ability to manage costs as revenue ratcheted higher drove Square Inc to earn an adjusted $0.27 per diluted share in 2017.

Looking ahead to the upcoming 2018 earnings results, Square Inc is expected to report an adjusted $0.46 per diluted share, which appears to be beatable after three straight quarterly beats. For 2019, Square could earn $0.81 per diluted share. (Source: “Square, Inc. (SQ),” Yahoo! Finance, last accessed January 25, 2019.)

After years of negative free cash flow (FCF), Square Inc generated positive FCF in 2017. The move to positive FCF will allow the company more financial flexibility in capital expenditures.

Fiscal Year

Free Cash Flow (Millions)

Growth

2013

-$108.5

2014 -$138.2

-27.4%

2015

-$9.9 92.9%
2016 -$2.3

76.6%

2017

$101.6

4,514.2%

(Source: MarketWatch,  op cit.)

Analyst Take

CEO Jack Dorsey has the vision to drive innovation and make Square Inc more than just a mobile payment company.

Some investors may be fearful that SQ stock trades at a whopping 104-times its 2019 earnings per share (EPS) and that its price/earnings to growth (PEG) ratio is 2.81, but for investors who believe in Square Inc’s long-term potential, it could pay off.