Is Square Stock a Buy Ahead of Earnings?

Square NYSE: SQ is set to report its fiscal first-quarter earnings on Thursday after the bell. The fintech’s shares have nearly quadrupled since the start of 2020, and investors are wondering if there is an additional upside.

The fact that Square is trading at nearly 200x forward earnings indicates that a lot of growth is baked into the share price. But Square, it turns out, is the type of company that can see explosive revenue growth for a long time.

Square Had a Stellar 2020

Any discussion about Square’s long-term growth prospects has to start with Cash App. On the fourth-quarter earnings call, CFO Amrita Ahuja pointed out that, “In 2019, Cash App had only one revenue stream with $100 million in gross profit, and in 2020, we had four with approximately $100 million or more, each of which grew at over 100% year over year.”

Bitcoin was responsible for $97 million in gross profit, falling just short of that $100 million threshold, but up more than tenfold over 2019 levels. More on Bitcoin in a bit.

As of December, Cash App had 36 million monthly active customers, up 50% yoy. The company’s average customer acquisition cost is less than $5, which is good because a) Square hasn’t had to spend too much money marketing Cash App and b) if growth slows down, Square can pour money into marketing to re-accelerate user growth.

Moving to Seller, we see that Square got $1.51 billion in gross profit from this segment in 2020, up 8% yoy. That seems disappointing for a major part of a richly valued company, but remember, in-person transactions plummeted in 2020 due to the pandemic. In 2021 and beyond, the Seller growth rate should pick up.

Bitcoin is Booming

Bitcoin nearly tripled between October 1 and December 31, so it shouldn’t be surprising that Cash App made more than 40% of its 2020 Bitcoin gross profit in the fourth quarter. The price of Bitcoin didn’t go up much in January, but interest in the cryptocurrency – as measured by Cash App activity – increased a lot.

In 2020, more than 3 million Cash App users bought or sold Bitcoin. But in January 2021, more than 1 million users bought Bitcoin for the first time. The cryptocurrency is up more than 70% since the beginning of February – as of this writing – which indicates that Cash App’s Bitcoin gross profit could record a sequential increase in the first quarter.

In Square’s fourth-quarter earnings release, the company announced that it purchased 3,318 Bitcoin. The total purchase price was $170 million, so Square paid an average of $51,236 per Bitcoin. Square previously announced that it bought 4,709 bitcoins back when the price was a little over $10,000 per Bitcoin.

Here’s the deal:

You should disregard the direct impact of the Bitcoin investments on Square’s bottom-line. We’re talking about a few hundred million dollars of Bitcoin for a company with a $100 billion+ market cap.

But Bitcoin, as both a direct source of gross profit and a way to get people using other parts of Cash App, is very valuable to Square.

Square Has Long-Term Growth Opportunity

The mobile payments market is projected to grow at a CAGR of nearly 20% over the next five years. Square, as an industry leader, could easily grow at a much faster rate.

Moreover, there’s no reason to expect growth to grind to a halt after 2025. Even if it slows down a bit, we could be looking at an industry that grows at a double-digit CAGR for the 5-10 years after that.

How Should You Play Square?

Square, like any company trading at nearly 200x forward earnings, comes with risk. There is a good chance that Square will more than grow into its valuation, but a couple of bad quarters could torpedo the stock.

That said, the long-term risk-reward is favorable. And now seems like a good time to get in.

Looking at the chart, you can see that shares are getting support at $240, around the 50-day moving average.

 

 

In addition to the nice entry point, there is a good chance that Square, led by Bitcoin, will release strong Q1 numbers on Thursday.