Square Has Risen for Six Days—Can It Rally Further?

Square (SQ) stock has been seeing growth for the last six consecutive days. It rose 0.37% to $67.42 on November 21. This gain was preceded by sequential rises of 1.21%, 0.96%, 1.6%, 2.7%, and 2.4%, respectively. It’s up nearly 9.6% in the last six trading days.

At its closing price of $67.42, Square has a market cap of around $30 billion. It’s trading 18.9% lower than its 52-week high of $83.20 and 35.3% higher than its 52-week low of $49.82. It’s gained over 20% year-to-date. In comparison, Square’s close peers PayPal (PYPL) and Shopify (SHOP) have returned around 21.9% and 128.3%, respectively, this year.

So why is Square on the rise? Should investors consider buying the stock? Will its rally continue? Let’s see what factors are in play.

Square’s impressive earnings results

Square topped estimates on both earnings and revenue in the third quarter, which it reported on November 6 after the market closed. Square’s EPS of $0.25 came in ahead of Wall Street’s estimate of $0.20. Its third-quarter earnings were also higher than its third-quarter EPS of $0.13 in 2018. With this, the company has delivered better-than-expected earnings for five consecutive quarters.

Square also reported adjusted revenue of $602 million in the third quarter, far above the consensus estimate of $596.4 million. Its adjusted revenue also came in above its guided range of $590 million–$600 million. It was also 40% higher than the previous year’s $431.1 million.

The company completed the $410 million sale of its food delivery app, Caviar, to DoorDash on November 1. Excluding Caviar, its adjusted revenue rose 43% YoY (year-over-year) in the third quarter.

The company’s gross payment volume and Cash App mainly drive its growth. In the third quarter, its gross payment volume grew 25.3% YoY to $28.2 billion. Cash App is its peer-to-peer payment app. Excluding Bitcoin, Cash App generated revenue of $159 million in the third quarter, up around 115% YoY.

Raised guidance for 2019

For 2019, Square has raised the lower end of its earlier earnings guidance. It now expects its 2019 EPS to be $0.76–$0.78. Earlier, Square said it expected its 2019 EPS to be $0.74–$0.78. Analysts expect its 2019 earnings to rise 65.4% YoY to $0.78 per share. For 2020, its earnings are expected to rise 23.8% YoY, according to Wall Street analysts.

Square has also raised its total revenue guidance for 2019. It now expects its total revenue, excluding Caviar, to be $4.415 billion–$4.435 billion. Earlier, it had provided total revenue guidance of $4.22 billion–$4.28 billion. Its raised guidance was the result of underlying growth trends in the Seller and Cash App businesses. Improvement in Bitcoin’s performance in the third quarter also helped raise its outlook.

Excluding Caviar, Square expects its adjusted revenue for 2019 to be $2.095 billion–$2.105 billion compared to its earlier forecast of $2.06 billion–$2.09 billion. Square management also gave preliminary guidance for 2020. The company expects its revenue to rise 30%. For 2019 and 2020, analysts expect its sales to increase 41.6% YoY to $2.25 billion and 27.4% YoY to $2.87 billion, respectively.

JPMorgan Chase analyst Tien-Tsin Huang recently told clients, “2020 is now officially an investment year, and in return, investors should expect Square to exit 2020 at an improved growth rate,” according to Investor’s Business Daily. Therefore, we expect the company to generate improved revenue in 2021.

Analysts’ latest revisions

Most analysts have given Square stock either “buy” or “hold” ratings. Currently, around 43.6% of the 39 analysts covering Square have “buy” ratings on its stock. Another 43.6% have “hold” ratings, while only 12.8% have “sell” ratings on the stock. Their mean price target of $73.03 implies an 8.3% upside from its November 21 closing price. Its median target price was $72.5 on the day.

Mad Money host Jim Cramer insisted on buying the stock in September. He said Square could be considered a “broken stock” but not a “broken company.” On November 19, he said Square was a “terrific financial technology company,” according to RealMoney.

Square stock is trading at a premium

Square stock has a premium valuation compared to its peer PayPal. It’s trading at a PE multiple of 71.24x for the next-12-month period compared to PayPal’s 29.63x. Square is trading at an enterprise value-to-revenue multiple of 10.21x, higher than PayPal’s 5.61x.

Square’s premium valuation seems justified. We expect it to drive significant revenue on the back of its Cash App and gross payment volume. The company’s Cash App has generated significant revenue for it. It has, therefore, added several features to its Cash App to attract users. Square has enabled its users to buy and sell Bitcoin on the app. It also recently added a stock trading feature, which could boost its revenue.

The company’s potential seller investments should also drive better payment growth in the second half of next year. We believe an improvement in product offerings, as well as an enhanced user experience, will also encourage a strong seller base.

Square’s returns

Square stock closed 6.4%, 9.3%, and 2.5% above its 20-day, 50-day, and 100-day moving averages of $63.36, $61.71, and $65.76, respectively. Since the price is above the moving average, the stock’s trend is an upward one.

Square’s 14-day relative strength index score of 64.24 indicates that it’s nearing the “overbought” zone. An RSI level of above 70 means that the stock is overbought. Square’s upper, middle, and lower Bollinger Band levels are $67.21, $63.36, and $59.51, respectively. The stock closed near its upper Bollinger Band level yesterday, indicating that it was overbought.

We believe SQ has picked up momentum, but its growth is sluggish given its potential investments. However, we think it has the strength to rally in the long term.