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Is Square Stock A Buy? Big Move Into Buy Now, Pay Later Consumer Financing

When you think of SQ stock, both the coronavirus pandemic and cryptocurrency Bitcoin quickly come to mind. Now there’s a big acquisition, too.




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Square (SQ) on Aug. 1 agreed to buy Australia-based consumer lending startup Afterpay in a $29 billion all-stock deal. Afterpay competes in the emerging “buy now, pay later” market that encroaches on credit card networks.

Some investors questioned whether Square needed to buy a BNPL company as opposed to building up its own capabilities or partnering. Competition is heating up in the buy now, pay later market.

“The Afterpay deal is the largest acquisition Square has made by nearly two orders of magnitude, representing about 25% of Square’s market cap and dwarfing Square’s acquisitions of Weebly and Tidal, which had been the company’s largest purchases,” said Lisa Ellis, a MoffetNathanson analyst, in a report.

Afterpay on Aug. 25 reported a bigger-than-expected loss as marketing costs jumped. Sales nearly doubled but bad debts climbed.

Square stock also reported mixed second-quarter results when it announced the Afterpay acquisition.

SQ Stock: Big Bet On Bitcoin

Bitcoin hit an all-time high near $65,000 in April.  Bitcoin in July fell to around $30,000, then rebounded. As of Sept. 13, Bitcoin traded around $44,200. The cryptocurrency is off 30% from its all-time high.

Square reported a $45 million impairment to operating income in the June quarter related to its Bitcoin investments.

In a tweet on July 15, Square Chief Executive Jack Dorsey said the company will create a new business line to help developers build financial services products focused on Bitcoin.

Square is “building an open developer platform with the sole goal of making it easy to create non-custodial, permission-less, and decentralized financial services,” Dorsey tweeted.

SQ stock surged in 2020 as investors focused on the growth of its consumer Cash App. They shrugged off worries over Square stock exposure to small businesses and restaurants that might close because of the coronavirus pandemic.

Square has closed the acquisition of a majority stake in Jay Z’s Tidal music streaming service for $297 million in cash and stock.

Square Stock: Investments Hiked In 2021

With multiple products, SQ stock faces stiff competition in both consumer financial apps and the small business market. Analysts expect Square’s rivalry with PayPal Holdings (PYPL) to heat up in 2021 as they improve digital wallets.

Other rivals include First Data‘s (FDC) Clover unit, Shopify (SHOP), merchant acquirers, and well-funded startup Stripe.

Square stock disclosed a new $170 million investment in Bitcoin in early 2021 on top of its $50 million purchase in October. The company reports Bitcoin holdings as unrealized gains on investments, and will be excluded from adjusted earnings, analysts say.

Square Chief Executive Jack Dorsey recently said the company is interested in developing a Bitcoin hardware wallet.

SQ stock had 40 million Cash App monthly active users as of June 30, up from 36 million at the end of 2020.

Cash App users are able to buy, hold and sell Bitcoin. Square’s adjusted revenue from Bitcoin are sales to app users, minus the cost of purchasing the digital currency.

But Square’s Bitcoin business has gross profit margins of only around 2%, analysts say.

SQ Stock: Payments Ecosystem

In its core business, Square aims to build a two-sided digital payments ecosystem, with products designed for both merchant sellers and consumer buyers. The Square Cash App helps individuals manage money.

For merchants, Square makes credit-card readers that plug into mobile devices. Its Square Capital division provides loans to sellers. While Square retains only 10% of Square Capital loans on its balance sheet, there’s still a risk of defaults.

Prior to the Covid-19 outbreak, analysts were divided on whether Square revenue growth would reaccelerate with margin improvement following a period of elevated investments. The Square Cash App, a peer-to-peer money-transfer service, competes with PayPal’s Venmo, Zelle and others.

Amid the coronavirus emergency, Cash App emerged as a digital alternative to traditional banks. Consumers used the Cash App’s direct-deposit feature to receive government stimulus payments, for example. But Cash App gross profit growth slowed over the summer, analysts say, as stimulus programs expired.

Square is testing a short-term borrowing feature for Cash App users. Square offers loans of $20 to $200. Cash App users are expected to pay pack the loans in four weeks, with interest.

Also, the Cash App provides a stock trading feature. Cash App offers a debit card through a deal with Marqeta.

The bearish view is that Cash App’s momentum proves transitory with low customer retention after the coronavirus pandemic eases.

The Square Cash app, Square Capital and Instant Deposit all contribute to the company’s subscription and services revenue. One key for Square is cross-selling more services to its existing pool of merchants, analysts say.

To broaden its consumer platform, Square plans to buy Credit Karma’s tax business for $50 million in cash. It’s a free service for consumers.

SQ Stock: Moving Upmarket To Bigger Sellers

The payment processor has the same chief executive as Twitter (TWTR) in Dorsey. The CEO-sharing arrangement has seemingly worked out for Square stock.

With roots in serving such micro-merchants as food trucks and farm-stand vendors, Square has moved “upmarket,” targeting larger businesses.

SQ stock ranks among the top 10 fintech companies. Bigger fintech companies include Visa (V), Mastercard (MA), PayPal, Fidelity National Information Services (FIS), Fiserv (FISV) and American Express (AXP).

In addition to selling credit-card readers, Square provides software for point-of-sale and back offices in order to manage inventory and other tasks.

Square recently focused on software products that can be used across many industries, such as invoicing, payroll and marketing. It also aims to integrate its payment tools into e-commerce platforms.

Instant Deposit Speeds Up Process

The company’s Square Instant Deposit allows merchants to immediately receive payments instead of waiting a few days for settlement.

Meanwhile, Square Card is a business prepaid debit card issued in partnership with Sutton Bank to small business owners on the Square platform.

Square on March 2 said its Utah-based industrial bank has launched services to small businesses. Called Square Financial Services, the bank will offer loans and deposit accounts.

In trying to move upmarket, Square takes on Worldpay and Global Payments (GPN).

Some fintech companies are merging, giving them greater scale vs. Square.

The company recently sold Caviar, a food ordering and delivery service, to DoorDash for $410 million.

One key question as competition heats up is the outlook for the gross payment volume — total volume of sales in dollars generated by merchant customers — also known as GPV. It’s a key financial metric for rivals like PayPal as well.

Square Stock Fundamental Analysis

Square’s Q2 earnings per share spiked 266% to 66 cents in the June quarter. Revenue surged 143% to $4.68 billion but missed estimates amid Bitcoin volatility. Excluding Bitcoin, revenue was $1.96 billion.

Analysts expected Square earnings per share of 30 cents on sales of $5.03 billion.

“CashApp’s year-over-year revenue growth (87%) decelerated from the prior quarter’s 139%, reflecting tough comparisons, with likely further deceleration during the next few quarters,” Wedbush analyst Moshe Katri said in a report.

Gross payment volume, or GPV, from merchant customers rose 88% to $42.83 billion.

Adjusted earnings before interest, taxes, depreciation and amortization, known as EBITDA, came in at $360 million, topping estimates of $179 million.

SQ Stock Technical Analysis

After its disappointing initial public offering in November 2015, Square stock meandered. In June 2016, SQ stock still traded just above its initial public offering price of 9.

That soon changed. From July 1, 2016, through a high of 101.50 set last Oct. 1, Square stock exploded nearly 995%. Its big run led one analyst to call Square the next FANG stock, joining the likes of Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet‘s (GOOGL) Google in stature.

Following its big run, Square stock fell more than 50% in late 2018 as many technology companies also crashed. SQ stock clawed back in 2019.

Square stock forged a proper entry point of 87.35 in early February, 2020 just before the coronavirus outbreak forced cities to shut down. Shares surged some 248% in 2020 as investors focused on the growth of its consumer Cash App.

Not many stocks roar back after a 50% correction. It takes time for them to digest gains and set up for another extended surge into new highs. Many never deliver a repeat performance such as SQ stock.

Even so, Square has wrestled with finding the right balance of revenue growth, investments and profitability.

Is Square Stock A Buy Right Now?

Square’s Relative Strength Rating is 84 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an 80 or better RS Rating.

The relative strength line, the blue line in the chart above, compares a stock’s price performance with that of the S&P 500. An upward-trending RS line tells you the stock is doing better than the general market.

SQ stock, meanwhile, has an Accumulation/Distribution Rating of C-minus. The rating runs from a best-possible A+ to a worst-possible E. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading. A falling Accumulation/Distribution Rating would be a sign that institutional buyers are exiting.

Square stock rallied on the Afterpay acquisition, hitting a record 289.23 a couple days after the deal was announced. But SQ stock then retreated and fell below its 50-day moving average

As of Sept. 13, SQ stock trades about 15% below an entry point of 283.29, according to IBD MarketSmith analysis.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.

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