Updated: Aug 2, 2020
I initially alerted about SQ on Jan 26, 2020, here: https://www.wininstocks.com/post/square-inc-sq-stock-analysis
At the time I alerted the stock was trading at $71.14. The price currently stands at $127. This is a 78% increase over the past 6 months.
78% increase over the past 6 months
The stock is going parabolic in the past 2 months, gaining more than 200% from the COVID stock market meltdown. It is flying in the uncharted territory of the new all-time high. If we go by the book rules that say ‘let your profit runs’ we should keep the position open until it gives a sell signal of crossing previous support line. At the current moment, the stop-sell should be placed at around $110. However, if it runs again, the stop loss has to be moved up to the next support line.
The question is: does Square (SQ) stock have the steam to keep going?
Analysts are predicting 2021 EPS to be in the range between -0.19$ to -1.15$ with average prediction standing at -0.58$. Average predictions for the next few years are:
There are quite a few predictions for SQ stock’s EPS for the next few years as it is unclear how low the impact of COVID will last and how deep it will be. I do believe the above predictions are quite conservative and SQ may actually beat them quite easily. I will discuss why I think that down below.
Once we get over with COVID analysts are predicting for SQ’s EPS to grow 120-150% which aligns very well with my calculations in the previous analysis that was based on Operating Leverage.
To grow EPS at 120% SQ needs to grow its revenue at 40-50% a year as its Operating leverage is about 3, meaning for each percent growth in revenues SQ grows profit by 3%.
So, is Square (SQ) stock overpriced?
At the price of $127 its forward PE for the year 2024 stands at 127. For 2025 – 49. Obviously, this is high, especially given we are calculating PE for 2024-2025.
If we use the projected EPS growth of 120%, the Price-to-Earnings-Growth (PEG) ratio is at around 1 for 2024, and about 0.5 for 2025. So, based on these calculations before 2025 starts the stock price may double to reach PEG of 1 (which is usually considered normal PEG). If there is a hype around the stock, we may even see the stock triple in by the end of 2025.
Now, the key question is: will SQ keep growing at 120% from 2025 onwards? Another question: are you prepared to wait this long?
For now, Square continues to show healthy growth of revenue doing 2 things: 1 – adding new users every new year; 2) growing revenue for users who signed up in previous years. The positive sign is that the growth is not slowing yet.
Also, Square highlighted the enormous opportunity represented by its Cash App. The payment app, which allows users to send and receive money to other users, represents a $60 billion market for Square. Some of that growth is happening now, as CEO Jack Dorsey said Cash App had a record number of new customers using the app in just the past week.
It seems that the analysts have not yet weighted this opportunity in their estimates. Annual revenue for SQ is currently $4.7 billion for 2019. SQ has a well-built customer base which will likely jump into using the App. If SQ successfully takes an additional 10% of the market with its Cash App it would see the revenue almost double.
Cash App growth total net revenue and gross profit increasing 147% and 104% year over year, respectively, in the fourth quarter of 2019. Cash App had approximately 24 million monthly active customers in December 2019, achieving 60% year-over-year growth.
Just to summarise, the stock does have the potential to keep going. However, there are a few considerations that you have to factor in:
The stock price has been moving up too quickly. A cool-down is likely coming.
EPS for 2020-2021 is expected to be low.
EPS is expected to start growing in 2022, until then the stock PE ratio is extremely high.
The company will need to grow revenue at ~40% minimum for the next 5 years to get to levels of being fairly priced.
The company is doing everything possible and has great tools in pipeline to make the growth possible.
The question is: are you a long-term investor or 4 year wait times are above your investment horizon. I do believe the stock price will flatten and might even decrease in the next year. If this happens, you may get a better chance to jump in.
If you hold the stock, set up stop loss below $110.
If you are thinking about buying, I would say HOLD and wait until the stock price comes down.
Before you go, check out MOGO, the Canadian wanna-be SQ that has more than 1 million active users and is storming Canadian market with its own recently introduced Cash App. The investors are just starting to realize MOGO is severely underpriced for its ambitions and the stock price is starting to move.
Here is my analysis on the stock: https://www.wininstocks.com/post/mogo-inc-mogo-stock-analysis