SQ with Nobias technology: Square Shares Are Up 2,100% Over The Last 5 years. Is it still a buy?
Throughout 2021, the fin-tech space has largely struggled (the Global X FinTech Thematic ETF (FINX) is only up 9.18% on a year-to-date basis, underperforming the broader markets by a significant margin). However, many investors continue to believe that the leading fin-tech names are going to become the most influential financial institutions in the future as we continue to move further and further into the digital age. One such name that is frequently talked about as a major disruptor and potential financial powerhouse is Square (SQ).
Square shares have risen by nearly 2100% during the past 5 years; however, they’re slumping a bit during 2021, with nearly 14% year-to-date performance (trailing the S&P 500’s 19.1% year-to-date gains). Square’s market cap has risen to an impressive $115.6 billion; yet, the stock still has a long way to go to catch up with leading big banks, such as J.P. Morgan (JPM), with a current market cap north of $475 billion. But, Square continues to innovate, leading many to believe that there is a lot of upside momentum left in the tank.
The company continues to aggressively invest in itself and this has allowed management to generate very strong bottom-line growth. Since becoming public in late 2016, Square has generated annual earnings-per-share growth of 17% in 2015, -31% in 2016, 154% in 2017, 74% in 2018, 70% in 2019, 5% in 2020...and right now, the consensus analyst estimate for 2021’s bottom-line growth sits at 124%.
Speaking of consensus EPS estimates, the Wall Street community expects to see Square generate earnings-per-share growth of 22% in 2022 and 38% in 2023, pointing towards a bright future ahead. One of the growth catalysts for Square comes in the form of its recent acquisition: Square’s $29 billion all-stock deal for Afterpay (a buy now, pay later leader) which broadens the fin-tech’s exposure into yet another area of digital finance.
In a recent Motley Fool podcast, Nobias 4-star rated analyst, Matt Frankel, discussed the Afterpay deal, explaining why he is bullish on the move. Highlighting Afterpay’s business model, Frankel explained that the company “Offers installment financing for purchases, no credit checks, no interest. Really a more appealing solution than traditional credit cards to a lot of buyers.” He continued, saying, “Afterpay has about $700 million in trailing 12-month revenue. They have 98,000 merchant clients, which skews toward enterprise clients [indistinguishable] like larger businesses, which Square desperately wants to bring into its ecosystem. They break out the percentage of revenue that comes from enterprise clients or larger businesses as part of their seller ecosystem volume. They're going to integrate this with the seller side of the business and the Cash App, making it easy for all of Square and millions of merchants to offer buy now, pay later services to their customers.”. With this in mind, the 4-star analyst called the move a “Pretty impressive acquisition” and said, “I love this just as a strategic move.”
In a separate article, you can see more of the podcast transcript, where Frankel touched upon why he sees the buy now, pay later movement as one with strong long-term potential. He said, “The no credit checks really is appealing as opposed, people always ask the question, why wouldn't I just use a traditional credit card? Because then you have to go through a credit check in the process like that. With buy now, pay later, you just click the button and it's set up and done.”
And apparently consumers agree. Frankel noted that Afterpay has “Ninety eight thousand active merchant accounts, little over 16 million active customers. They're growing fast, those numbers are up 78% and 63% year-over-year.” Now, Square has access to this fast growing market. The move did dilute SQ’s shareholders. The all-stock nature of the deal will add a significant number of shares to Square’s outstanding share count. However, in the short-term, it appears that the market believed the risk is worth the reward.
In the immediate aftermath of the news, SQ shares were up 11%. However, in the weeks since the Afterpay deal was announced SQ has given up those gains. A lot of this is due to SQ stock’s speculatively high valuation.
Square currently trades for 131x 2021 earnings-per-share estimates. This is an extremely lofty premium (even for a name in the fin-tech space). For comparison’s sake, Square’s major rival, PayPal (PYPL) trades for 60.5x 2021 earnings estimates.
Both companies have premiums placed upon them that dwarf the ~21x forward multiple currently applied to the S&P 500; however, SQ’s valuation is more than twice as high as Paypal’s on a forward 2021 price-to-earnings basis. With this in mind, it appears that the market is pricing a lot of Square’s future growth into the current share price. This is an issue that Nobias 5-star rated analyst, Nicholas Rossolillo, covered in his recent article titled, “Is It Too Late to Buy Square Stock?”
Rossolillo highlighted SQ’s 2000%+ total returns over the last 5 years and noted the recent pop that shares got after the Afterpay deal. However, after posing the rhetorical question, is it too late to buy SQ shares, he answered, “Hardly.”
Rossolillo was bullish on the Afterpay deal, but also noted that SQ’s recent quarterly results were solid (although they were largely overshadowed by the big M&A announcement). He wrote, “Gross profit (which largely excludes effects from Bitcoin since Square generates little in the way of profit from the cryptocurrency) was up 91% year over year to over $1.14 billion.”
Rossolillo notes that Square's business is currently divided into two segments: the seller ecosystem and consumer-facing Cash App. During Q2, he said, “For the seller ecosystem that operates under the Square name and includes digital payments and banking services for merchants, gross profit grew 85% year over year to $585 million.” He continued, saying, “Then there's Cash App, which grew by a triple-digit percentage pace last year due to consumers being cooped up at home and turning to digital tools to get their money management needs taken care of. But Cash App is continuing its epic advance even as effects of the pandemic ease. Gross profit for the segment was up 94% year over year to $546 million.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Rossolillo said that he expects SQ’s year-over-year growth to slow as the poor quarters which were negatively impacted by the COVID-19 recession last year are removed from the direct comparisons; however, over the long-term, he remains bullish on SQ’s upside potential. He lists a handful of companies with much larger enterprise values than Square, showing that there is plenty of market share for the company to attempt to take. Then, he highlighted SQ’s $124 billion enterprise value, saying, “An enterprise value of $124 billion sounds like a big number, but it's still a pretty small business in a global financial services industry worth trillions of dollars every year.”
Rossolillo concludes, “Square is aiming to stitch together elements from multiple legacy peers, combining digital payments with banking, investment, and financial management software. It's still growing at a rapid pace and not letting its foot off the gas, and it has massive potential ahead of it in the next decade as younger generations look for a one-stop-shop in a mobile-friendly format. It's far from too late to buy Square if you plan to stick with this fintech stock for the long haul.” This bullish outlook mirror’s the average sentiment amongst the credible analyst community that the Nobias algorithm tracks.
Right now, 87% of the credible authors that we follow express a “Bullish” outlook on SQ shares. The average price target amongst the authors deemed credible by the Nobias algorithm is $319.83 (all of these price targets have been updated since the start of August). Relative to SQ’s current share price of $255.79, this represents upside potential of approximately 29%.
Square shares have experienced a bit of weakness in recent weeks and now trade down nearly 14.3% from their 52-week high of $289.23. Looking at the data from the credible analysts that we track, this dip appears to be a buying opportunity.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long PYPL. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.