Square Inc Up 27% This Year; Is there Much More to Come?

Square Inc Up 27% This Year; Is there Much More to Come?

Square Inc’s Innovation Could Reward Investors

When you evaluate technology companies, key criteria includes the business, the leadership team, and the innovation shown by the company.

With that in mind, Square Inc (NYSE:SQ) is an innovative play on the massive growth in the global e-commerce market.

Think about it this way: companies like Square are making it easier for merchants around the world to sell their goods and services via its rapidly growing core business of digital payment solutions.

SQ stock is down 30% from its 52-week high of $101.15 in October 2018, but it has rallied 42% from its December lows and has been outperforming the Nasdaq.

Chart courtesy of StockCharts.com

Led by enigmatic co-founder Jack Dorsey, Square has blossomed over the last few years via providing value-added services to small and medium businesses.

In addition to its core transaction business, Square operates a billion-dollar lending service for its clients and it recently launched a free Mastercard-branded debit card for small businesses. Square will also allow Bitcoin deposits via its “Cash App.”

And in a move catering to the rapid rise of food delivery services, the “Square for Restaurants” platform allows for ordering from DoorDash, the leading food delivery service.

Strong Fundamental Growth Bodes Well for Square Stock

A look at Square Inc’s revenue growth shows impressive gains and supports a bull case for SQ stock.

The company’s revenues edged higher in the last four straight years, increasing from $850.2 million in 2014 to an impressive $3.3 billion in 2018. This represents a compound annual growth rate (CAGR) of 40.4%.

Fiscal Year Revenue (Billions) Growth
2014 $0.85
2015 $1.3 49%
2016 $1.7 34.9%
2017 $2.2 29.6%
2018 $3.3 49%

(Source: “Square, Inc.,MarketWatch, last accessed June 27, 2019.)

Better yet, Square is estimated to continue its impressive revenue growth over the next two years.

Furthermore, the company managed to turn its earnings before interest, taxes, depreciation, and amortization (EBITDA) positive in 2017 and 2018, as the below table shows.

Fiscal Year EBITDA (Millions) Growth
2014 -$107.3
2015 -$92.2 14.1%
2016 -$81.5 11.7%
2017 $50.1 161.5%
2018 $117.1 133.8%

(Source: Ibid.)

And while Square has yet to deliver positive generally accepted accounting principles (GAAP) diluted earnings per share (EPS), the loss has narrowed in three straight years and the company has been producing profits on an adjusted basis.

Fiscal Year GAAP Diluted EPS Growth
2014 -$0.46
2015 -$0.63 -36.4%
2016 -$0.50 21%
2017 -$0.17 66.9%
2018 -$0.09 42.8%

(Source: Ibid.)

Square Inc’s EPS estimates have been rising, which is a bullish sign. For 2019, Square is expected to report an adjusted $0.76 per diluted share and follow that up with $1.13 per diluted share in 2020. (Source: “Square, Inc. (SQ),” Yahoo! Finance, last accessed June 27, 2019.)

Square has been generating positive free cash flow, marked by impressive growth in 2017 and 2018.

Fiscal Year Free Cash Flow (Millions) Growth
2014 -$138.2
2015 -$9.9 92.9%
2016 -$2.3 76.6%
2017 $101.6 4514.2%
2018 $233.9 130.2%

(Source: MarketWatch, op. cit.)

Analyst Take

The fundamentals and expected financial growth support a bull case for Square stock.

Moreover, insiders have been heavily buying SQ stock, to the tune of 6.7 million shares bought and only 1.7 million shares sold over the last six months. (Source: Yahoo! Finance, op. cit.)

Square Inc has plenty of growth opportunities that should reward investors with a long-term view.