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Why Square's Stock Is a Bargain Today

Square (NYSE: SQ) has been one of the hottest growth stocks over the past few years due to its strong position in the burgeoning fintech industry and its soaring revenue. However, the company's shares peaked in September 2018, and it has been a roller-coaster ride ever since. Back in July, Square's stock took a nosedive after the tech giant released its second-quarter earnings report. Evidently, investors weren't happy with the company's weaker-than-expected guidance. After the stock's decline, Square's shares are trading at 63 times future earnings , which isn't that expensive when compared to other growth stocks.

Here's why Square is a good buy at current levels.

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Strong financial performance

Square released its third-quarter financial results on Nov. 6, and the company's performance was impressive. Here are a few key metrics to consider:

  • Square's gross payment volume (GPV) was $28.8 billion for the quarter, up from $22.5 billion (or 25%) year over year.
  • The company's total net revenue increased by 44% compared to the year-ago period and was $1.27 billion.
  • Square's net income for the quarter was $29 million, compared to a net income of $20 million recorded in Q3 2018.
  • The company's peer-to-peer (P2P) payment app, Cash App, recorded total net revenue of $115 million (excluding bitcoin), up 115% year over year.

Square also spoke highly of its seller ecosystem which, according to the company, will achieve an adjusted EBITDA profit margin of 30% for the current fiscal year. Overall, the company more or less kept up with the dazzling pace it has gotten investors used to in recent years, and Square is showing no signs of slowing down. 

Other avenues for growth

Investors can be optimistic about Square's future, as the company is pursuing several growth opportunities. Perhaps chief among them is Cash App, which has become far more than a simple P2P payment app in recent years. Cash App offers prepaid credit card, inventory, and payroll for businesses, and most recently, Square announced its Cash App would start offering free stock-trading services.

While Cash App will have to contend with strong competition to attract customers for its stock-trading business, this could be an opportunity to broaden its appeal even more, a strategy that has thus far worked wonders. Square's endgame seems to be to incentivize those who make their way onto its Cash App to stick around thanks to its "broad portfolio of tools" (to Quote Square's CEO Jack Dorsey). 

Further, Square recently announced it would allow sellers of cannabidiol (CBD) products to have payment processing capabilities. After it launched a beta program to test the waters with this initiative earlier this year, Square decided to go all in, and this move could pay rich dividends down the road. Despite the broader cannabis industry facing serious obstacles over the past six months or so, the future growth of the sector is too juicy to ignore. 

Worth the premium?

Square has built a strong ecosystem of complementary tools and services for businesses, and it is looking to do the same for individuals with its Cash App. The company's latest move -- to offer free stock trades via Cash App -- fits well within its broader strategy. Square still has much room for growth, and that is why it is worth serious consideration, especially given its recent strong financial performance and the fact that its stock has been crawling of late. 

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square and recommends 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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