Jim Cramer, the host of CNBC’s Mad Money, seems to have a soft spot for Square (SQ) stock. Last week, Cramer mentioned that the stock has upside potential despite its struggles. He has also said that Square is a broken stock and not a broken company. Cramer claimed that Square’s core business is strong even though it faced some management issues in the past. He thinks that the stock is worth owning. According to Cramer, investors should buy the stock when it falls.
Square stock is volatile
Square stock hasn’t been able to pick up the pace since October last year. The stock touched $99.01 on September 28, 2018. However, the stock has fallen to around $59.03 in a year. Square stock closed 1.21% lower on Thursday. The stock is trading 41.6% lower than its 52-week high of $101.15. Meanwhile, the stock is trading 18.5% higher than its 52-week low of $49.82.
Square stock has only gained 5.2% YTD (year-to-date) as of Thursday. Square has significantly underperformed its peers this year. In comparison, PayPal (PYPL) and Shopify (SHOP) has returned around 26.2% and 134.7%, respectively, YTD.
The stock started falling after the company announced CFO Sarah Friar’s departure on October 10, 2018. Friar decided to leave Square and become Nextdoor’s CEO. Amrita Ahuja replaced Friar in January. Cramer thinks that analysts and institutional investors became a little skeptical on the stock after Friar’s departure.
Weak second-quarter results
Square stock has remained in the red since the company reported its second-quarter results on August 1. The shares have fallen more than 27% despite beating the earnings and revenue estimates in the second quarter. Square’s revenues have been falling in the past few quarters due to lower payments volume growth and more competition. The revenue growth rate fell from 68% in the third quarter of 2018 to 64% in the fourth quarter of 2018, 59% YoY in the first quarter, and 46% YoY in the second quarter.
The company has also given a conservative view for the third quarter. Square expects its third-quarter EPS to be $0.18–$0.20. The company expects its 2019 EPS to be $0.74–$0.78. Analysts expect an EPS of $0.21 in the third quarter—up 58.5% YoY. Analysts expect the company’s 2019 EPS to grow 64.2% YoY to $0.77. However, the growth will likely fall to 43.6% YoY in 2020.
Square expects third-quarter revenues of $590 million–$600 million. For 2019, the company expects revenues of $2.25 billion–$2.28 billion. Analysts expect the company’s third-quarter revenues to grow 38.6% YoY. For 2019 and 2020, analysts expect the sales growth to be 43.2% YoY and 33.8% YoY, respectively.
Why does Cramer like Square stock?
Despite the troubles, Cramer thinks that Square could give good returns in the long term due to its strong operating model. He also bets on the company’s peer-to-peer payment app called “Cash App.” Cramer appreciated the company’s decision to divest its food-delivery service Caviar to the DoorDash delivery app for $410 million. Square expects to close the deal by the end of the year to focus more on its Cash App.
Notably, Cash App, which competes with PayPal’s Venmo, has been adding to the company’s revenues due to higher usage and engagement. In the second quarter, the company’s Cash App revenues were $260 million. Excluding bitcoin trading, Cash App generated $135 million in total net revenues.
Square also launched many services and offers to boost its Cash App user base. Initiatives like opening bitcoin trading for Cash App users, adding automated clearing house direct deposits for paychecks, and offering cashback for using Cash Card have made Cash App very popular among users.
Most of the analysts have rated Square as a “buy” or a “hold,” Currently, around 42.1% of the analysts have a “buy” rating on Square stock, 47.4% have a “hold” rating, and 10.5% have a “sell” rating.
On Wednesday, Craig-Hallum analyst Bradley Berning upgraded Square’s rating from “sell” to “hold” and increased its target price from $55 to $63. He thinks that Square should invest 2.7%–3.7% of its revenues in incremental spending. Berning also expects the adjusted EBITDA to expand in 2020. However, he doesn’t think that the valuation is compelling enough for investors to buy the stock. An Evercore ISI analyst also thinks that the stock is overvalued. The analyst slashed its target price on Square stock to $50 from $64 on Monday.
Canaccord Genuity analyst Joseph Vafi also lowered Square’s rating from “buy” to “hold” and slashed its target price from $88 to $64 last week. On September 11, Bank of America analyst Jason Kupferberg cut its target price from $78 to $70. Kupferberg expects the company to make heavy investments in the Seller and Cash App platforms in 2020, which will pressure the earnings.
In contrast, Citigroup increased its target price on Square to $95 from $90 on September 10. Suntrust Robinson increased its target price on Square to $80 from $75. The firm raised its rating to “buy” from “hold” on September 3.
Square stock trades at a premium
Square stock has a premium valuation compared to PayPal. Notably, Square stock trades at a PE ratio of 57.64x in the next 12-month period. In comparison, PayPal trades at a PE ratio of 30.96x. Using the EV-to-EBITDA metric, Square trades at a ratio of 43.63x, which is higher than PayPal’s PE ratio of 22.79x.
Square’s premium valuation doesn’t look attractive. We don’t see growth in the company’s upcoming revenues.
Reading the technical levels
Square’s 14-day RSI (relative strength index) score is 36.59, which indicates that investors are currently neutral but prefer to “sell” the stock. Notably, an RSI reading above 70 indicates that a stock is in “overbought” territory, while an RSI level below 30 means that the stock is in “oversold” territory.
On Thursday, Square stock closed near its Bollinger Band lower range level of $57.53. The value shows that the stock has been oversold.
Although Cramer believes in Square stock, analysts and investors don’t think that the company is in great form. We think that the company should invest in revenue-generating areas and boost its Cash App to outperform its peers. High revenue generation could justify the stock’s premium valuation. Until then, we’ll wait and watch the stock.