Is Square Stock a Buy?

It's been a rough year so far for Square (NYSE: SQ) stock. After rising higher earlier this year, the stock's performance has turned negative, partly because of disappointing guidance in its most recent quarter that sent the price over a cliff. Down 25% in the past three months, the stock could be an intriguing buy.

Let's take a closer look at whether the stock is a deal today or if it's in danger of falling farther.

The upcoming quarter could be crucial

In November, Square is going to release its latest quarterly results. The last time it did that, things didn't go so well; a combination of lowered guidance and news that the company would be selling Caviar, its food delivery service, resulted in the stock going into a tailspin. While expectations might be lower this time around, the company is still going to be under pressure to meet its revised numbers.

An earnings beat would definitely help the stock recover, but given the uncertain macroeconomic environment, it's far from a sure thing that Square will be able to produce a great result. And with the company having recorded a profit of $19.6 million last year, it might not be easy to impress investors. However, net income during that period did benefit from a $37 million one-time gain as a result of the initial public offering and subsequent mark-to-market valuation of Square's investment in Eventbrite. So, investors may want to keep a closer eye on the financial technology company's progress on its adjusted bottom line. 

Customer and merchant using the Square terminal.

Image source: Square.

One potential growth driver: CBD

While it might not help in time for Q3, one area in which Square could see a lot of future growth is in the cannabis business. The company has recently made its service available for companies selling cannabidiol (CBD) products. With a lot of potential growth in the cannabis industry, this could be a big opportunity for Square. However, this doesn't mean all CBD sales will be eligible, as Square does specify that its service is only available for hemp-derived CBD products, which were legalized late last year under the Farm Bill.

However, given the growing excitement surrounding CBD products, this sector could still deliver some strong results for the company. One estimate has the U.S. market being worth as much as $6 billion by 2025.

Another key area: Cash App

Last quarter, Square's Cash App saw a big boost in activity, and it was a key reason the company was able to achieve sales growth of 44%. The app's ease of use in enabling both individuals and businesses to send money gives it a lot of potential for drawing in more users and processing more transactions. And allowing users to trade bitcoin using the app could attract a variety of consumers.

The Cash App could be key to the company's growth, especially with younger users, giving them a way to transfer money easily using only their phones.

Is the stock too expensive?

The biggest negative for the stock today is that it may just be too pricey. Although its $25 billion market capitalization may not seem that high for a rising tech stock, given that its sales have come in at just under $4 billion over the past four quarters, it's definitely not a cheap buy. Currently, Square is trading at 6.4 times sales, and its price-to-book multiple is 21, indicating that investors are paying a big premium to own the stock today.

Should you buy Square stock?

With a growth rate of 44% and many different ways to continue increasing sales, there are a number of reasons Square still looks like a solid long-term buy. Throw in Cash App's ease of use and versatility, and you've got a player that stands apart from other growth stocks. While it may be a bit expensive, the Square platform's integration with many different apps and businesses makes it very likely that Square's growth is nowhere near done.

Although the stock may be trading at a premium today, with so much growth potential still out there, Square could bring those multiples down in a hurry. The stock is a solid buy, and it could be flying under the radar -- at least for now.

Editors note: A previous version of this article mistakenly referred to profit as adjusted profit. The article has been updated.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short January 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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