Square (SQ) stock has remained highly volatile in the past year. It saw a fall after the departure of CFO Sarah Friar in October 2018. Friar left Square to take on the position of CEO at social networking company Nextdoor. Analysts and investors remained skeptical even after Amrita Ahuja joined the company as its new CFO in January 2019. The stock has fallen 0.4% since November 29, 2018.
However, SQ has picked up momentum recently. It’s up around 13.5% since its earnings release on November 6. Many analysts have also turned bullish on the stock, and CNBC’s Mad Money host Jim Cramer also favors it.
Why is Cramer betting on Square? Does the stock have the potential to rally? Why are analysts also bullish? Let’s look at what factors are driving its performance.
Cramer likes Square
Last week, Cramer stated that Square “remains a terrific financial technology company,” according to RealMoney. Cramer seems to have a soft spot for this payment company. Back in September, he stated that it was worth buying. He then said Square could be deemed a “broken stock” but not a “broken company.”
Recently on Mad Money, Cramer interviewed Ahuja. Ahuja told Cramer that the company was relying on “three horizons of growth.” Her strategies include growing the customer bases in Square’s buyer and seller ecosystems, enhancing cross-selling functions, and bridging the gap between the two ecosystems. After the interview, Cramer insisted that investors consider including Square in their portfolios.
Cramer believes that despite its management issues, the company is growing its revenue and user numbers. It’s focusing on its P2P (peer-to-peer) payment app, Cash App, to expand its user base. Square is optimistic about its Cash App and GPV (gross payment volume) driving significant revenue.
Cash App and GPV
Excluding Bitcoin, Cash App’s revenue rose around 115% YoY to $159 million in the third quarter. The company has also enabled its users to trade Bitcoin on its Cash App. The recent sale of its food delivery service, Caviar, could help the company focus more on Cash App.
Per a CNBC report, Square had 15 million monthly Cash App active users as of December 2018. In comparison, PayPal’s (PYPL) Venmo had 40 million users at the end of March. We believe improved product offerings will enhance the user experience and promote a strong seller base for the company.
In the third quarter, Square’s GPV rose 25.3% YoY to $28.2 billion. This GPV growth was the same as in the second quarter. We believe the company’s potential seller investments will drive its GPV in the second half of next year.
Higher visibility ahead
Square has increased visibility for 2019. The company expects to see growth trends in the seller and Cash App businesses going forward. Square’s investment initiatives could also boost its GPV.
During the third quarter, the company increased the lower end of its 2019 earnings guidance. It has now revised its guidance to $0.76–$0.78 from $0.74–$0.78.
Square has also raised its total revenue guidance for 2019. Excluding Caviar, Square expects its adjusted revenue for 2019 to be $2.095 billion–$2.105 billion. Earlier, this forecast was $2.06 billion–$2.09 billion. Bitcoin’s improved performance in the third quarter helped the company increase its outlook. Square now expects its revenue to rise 30%.
Analysts are bullish on Square stock after its earnings
Around 45% of the 40 analysts tracking Square stock have given it “buy” ratings. A total of 42.5% have “hold” ratings, while only 17.5% have “sell” ratings on the stock. Their mean price target of $73.89 implies a 6.1% upside from its closing price on November 27.
On November 26, Macquarie initiated coverage on Square stock with an “outperform” rating and a price target of $105. Macquarie analyst Dan Dolev anticipates more than a 5% upside to the company’s 2020 guidance, as cited by Benzinga. Dolev is extremely bullish on Square’s Cash App and GPV growth and believes that its guidance was conservative. Macquarie expects as much as 65% growth for Cash App compared to management’s expectation of about 45% growth. Dolev even mentioned that a Google Trends search showed that “Cash App is garnering increased attention in traditional Venmo strongholds like New York, California or Massachusetts.”
Dolev also believes that Square will meet or exceed its margin goals in 2020 despite the higher marketing expenses it has planned for next year. The analyst is optimistic about Square’s potential to grow its payment volumes and thereby its sales.
On November 8, UBS, which initiated coverage on Square in October, reiterated its “buy” rating on the stock.
Square’s technical details
Square’s 14-day RSI (relative strength index) score is 69.71, which indicates that the stock is nearing “overbought” territory. An RSI number of above 70 suggests that a stock is overbought and investors are extremely bullish.
On November 27, Square stock closed near its Bollinger Band upper-range level of $70.15, suggesting that it’s in overbought territory.
On the day, the stock closed 7.9%, 11.5%, and 6.3% above its 20-day, 50-day, and 100-day moving averages of $64.57, $62.46, and $65.50, respectively. Since its price is higher than its moving averages, the stock’s trend looks to be an upward one.
Considering analysts’ comments and Cramer’s optimism, I believe the stock has strong growth prospects next year. Its technicals also indicate that it has upside potential and investors should think about buying.