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3 Macro-Tailwinds That Could Drive Square Stock In The Near Term

Josh Enomoto

After an explosive rally throughout most of last year, Square (NYSE:SQ) was destined for a correction. That’s exactly what happened. In the final quarter of 2018, SQ stock dropped from nearly $100 to just over $56 by December end.

3 Macro-Tailwinds That Could Drive Square Stock In The Near Term

Source: Chris Harrison via Flickr (Modified)

Such volatility obviously didn’t deter long-term Square stock believers. On a year-to-date basis, SQ is up nearly 33%. Although a significant distance away from its triple-digit peak, the upstart payment processing tech firm has treated stakeholders very well.

That said, this year’s strong run isn’t lacking serious questions. Most of the gains occurred in the first two months of this year. Since the beginning of March, SQ stock is actually down double digits.

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We’re not just talking about isolated trading sentiments. For instance, the ongoing U.S.-China trade war is a severe overhang on almost everybody. If we do have a prolonged tariff battle, domestic consumer sentiment will likely decline. If that happens, that hurts small businesses, the very segment to which Square stock is highly levered.

These distractions are nothing to scoff at. I’ll further concede that we may see nearer-term pain in SQ stock. However, the macro-trends far outweigh the noise. Here are three massive tailwinds to consider:

Support for Small Businesses Benefits SQ Stock

Drive around your local retail centers and chances are you’ll come across a familiar scene: both big and small operators closing up shop.

Democratic presidential candidate Andrew Yang has two culprits he loves to point out: automation and Amazon (NASDAQ:AMZN). He makes valid arguments. Automation will almost surely wipe out many entry-level retail jobs. And Amazon makes driving to the mall increasingly irrelevant.

However, the mom-and-pop stores at least may have some reprieve from the digital onslaught. Advocacy and awareness groups have over the years encouraged shoppers to think small. This drive has led to significant achievements, such as Small Business Saturday, a shopping holiday held after Black Friday.

But consumers aren’t just thinking about the mom-and-pops for one day of the year. Instead, they’ve now made it a habit. In fact, a majority of consumers prefer shopping at small businesses during the holiday season.

According to BlackEnterprise.com, millennials are willing to pay more at small-business retailers. This sentiment is especially noteworthy because millennials currently represent the largest workforce in the U.S. Logically, this all benefits SQ stock.

How? As I briefly mentioned above, Square specializes in payment processing. But what they’re really doing is equalizing the playing field. With their payment devices and online services, small businesses have the same tools as their larger counterparts. It’s something to keep in mind when Square stock goes on discount, like right now.

Risk-Taking May Pay Off for Square Stock

One of the reasons why I’m bullish on SQ stock is that Square’s management team takes smart risks. Recently, the company made headlines when reports indicated that they’re quietly moving into the cannabidiol, or CBD space.

On surface level, this shift presents huge risks, perhaps bigger than the potential payoff. True, most Americans today support marijuana legalization. Even some Republicans have advocated for cannabis initiatives. However, marijuana remains illegal under federal law.

That’s because the much-maligned plant has the dreaded Schedule I classification. This means that the federal government doesn’t see any medicinal value with marijuana. It also implies that at any time, the feds could crack down on cannabis firms.

Unsurprisingly, this has kept traditional financial institutions from going anywhere near CBD companies. It’s not a stretch to say many small CBD businesses are desperate for cash inflows. Square can obviously help bring legitimacy to this industry, which may lift Square stock.

But the real gamble is banking on full legalization at the federal level. Up to last year, that concept seemed like a pipe dream. However, an increasing number of states voting for legalization as well as geopolitical pressures have rationalized this once-wild idea.

I talked about this extensively in my last write-up about Canopy Growth (NYSE:CGC). In a nutshell, a prolonged trade war will kill jobs. But marijuana creates jobs and is the fastest-growing segment of the labor market.

If Trump insists on playing tough with China, he’ll have to concede on weed. Ultimately, with Square’s early push into CBD payment processing, SQ stock should jump even higher.

SQ Enjoys International Opportunities

A brilliant aspect regarding the longer-term outlook for Square stock is that the domestic tailwinds are quite substantial. However, the tech firm has many more exciting opportunities abroad.

It’s another topic I wrote about last month. To summarize, Japanese society has historically conducted commerce using cash transactions. Only recently has the average Japanese consumer started to use credit. Even then, the adoption rate is slow.

Your typical digital-payments processing company might look at that and not even think about Japan. Not SQ. As with CBD, their leadership is characterized by visionary thinking. Once Japan opens to the idea of credit transactions, it can create a massive ripple effect for SQ stock.

After all, Square took that initial risk to secure themselves a stronghold in this market.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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