Square (SQ) stock has remained extremely volatile in the past year. The stock has underperformed the broader markets and most of its peers from the previous year. We noted that Square stock had stellar returns of over 55% in 2018. However, the stock has only gained 3.4% in one year as of Tuesday. In comparison, the S&P 500 rose to about 18.2%. The sudden downtrend in the stock was due to the departure of CFO Sarah Friar in October 2018. Her exit made many analysts and institutional investors cautious about Square’s future.
However, the company gradually started gaining steam and caught analysts’ and investors’ attention. Jim Cramer, CNBC’s Mad Money host, thinks that the stock has upside potential. Square stock has gained about 7.3% since the company announced its third-quarter earnings on November 6. The stock has risen 17.4% this year as of Tuesday. However, Square is still lagging PayPal (PYPL) and Shopify (SHOP). PayPal and Shopify have returned around 23.2% and 165.8%, respectively, this year.
What’s boosting Square stock?
Square’s third-quarter performance impressed investors. The company beat analysts’ earnings and revenue estimates. The sales were 44% higher than the same quarter the previous year. The adjusted EPS rose over 90% YoY (year-over-year) in the third quarter.
We think that the revenue growth is due to a higher GPV (gross payments volume). The GPV includes card payments and peer-to-peer transfers from Square’s Cash App. In the third quarter, the GPV grew 25.3% YoY to $28.2 billion. We think that the company’s potential seller investments should drive the GPV in the second half of next year.
Square also generated revenues from bitcoin deposits in the third quarter. Bitcoin contributed to 12% of the company’s total revenues. Excluding bitcoin, Square’s Cash App revenues rose around 115% YoY to $159 million in the third quarter. The company also allowed its CashApp users to trade bitcoin cryptocurrency. The recent sale of the food delivery service Caviar will help Square focus more on its Cash App. We think that the company’s focus on Cash App could give long-term returns.
According to a CNBC report, Square had 15 million Cash App monthly active users as of December 2018. In comparison, PayPal’s Venmo payment app had 40 million users at the end of March. We think that improved product offerings would enhance users’ experience and help the strong seller base.
What’s in the offing?
Currently, Square stock is trading sideways. However, the stock could trade higher in the near term due to strong growth prospects. The company expects growth opportunities in the Seller and Cash App businesses. Square’s potential seller investment initiatives could also boost its GPV.
During the third quarter, the company has increased the lower end of the 2019 EPS guidance to $0.76–$0.78. Earlier, the outlook was $0.74–$0.78 per share. Square has increased its total revenue guidance for 2019. Excluding Caviar, the company expects its adjusted revenues to grow to $2.095 billion–$2.105 billion for 2019. Earlier, the forecast was $2.06 billion–$2.09 billion. The improved bitcoin performance in the third quarter helped the company raise its guidance.
Meanwhile, most of the analysts remain neutral on Square stock. Roughly 17 analysts suggest buying the stock—unchanged from last month. Meanwhile, 18 analysts suggest a “hold”—up from 17 analysts the previous month. Five analysts suggest a “sell”—unchanged from the previous month. Analysts’ target price of $73.79 reflects an upside potential of 12.1%.
Reading the technical levels
Square’s 14-day RSI (relative strength index) score is 49.86, which indicates that investors are neutral on the stock. Notably, an RSI index of above 70 indicates that a stock is in the “overbought” territory, while an RSI level below 30 means that the stock is in the “oversold” area.
On Tuesday, Square stock closed near its Bollinger Band middle-range level of $66.54. The value indicates that the stock isn’t overbought or oversold.
Square’s premium valuation
Square stock trades at a PE ratio of 68.66x in the next 12-month period. In comparison, PayPal, Visa (V), and Mastercard’s (MA) PE ratios were 29.64x, 28.18x, and 31.89x, respectively. We think that the company should invest more in Cash App and other revenue-generating areas to justify its premium valuation.