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Buy SQ Stock As Square Enters the Next Stage of Its Life

James Brumley

Compared to 2017 and the bulk of 2018, Square (NYSE:SQ) has been disappointing of late. SQ stock is still down 36% from its early-October high, unable to hold on to its rebound gains from earlier this year. Indeed, shares are down nearly 18% from March’s average price, largely thanks to a slowdown in revenue growth.

Buy SQ Stock As Square Enters the Next Stage of Its Life

Source: Chris Harrison via Flickr (Modified)

Investors and analysts alike, however, may have been imposing unfair expectations on the company. The bigger it gets, the tougher the comparisons become. Traders revolted at the initial sign of a headwind.

It was an inevitable development for Square, though, just as it’s an inevitable development for most young tech companies that are building a business on a good idea. Eventually, an organization grows out of its high-growth phase and moves into the mature phase of its life.

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That unexpected graduation upended this name, but the subsequent weakness is an opportunity to step into SQ stock on the cheap while the market reframes what Square should be at this stage.

Tough Act to Follow

The fact that it was able to launch at all is impressive in and of itself.

When Square debuted in 2009, Paypal Holdings (NASDAQ:PYPL) was arguably the king of the online payment world, while players like Visa (NYSE:V) and First Data (NYSE:FDC) seemingly held a firm lead on their piece of the payments market.

Square’s founders Jim McKelvey and Jack Dorsey, who also runs Twitter (NYSE:TWTR), saw an unmet need, though. With 23 million sole proprietors in the United States in addition to millions more small shops being ignored or poorly served by the credit card industry, allowing them a simple and cost-effective means of accepting card payments has proven to be a huge opportunity.

Several numbers confirm the idea, not the least of which is the 350% advance SQ stock has dished out since the end of 2016. Accelerating double-digit growth made for a convincing bullish argument.

Things began to change in the latter part of last year. The pace of growth began to slow and outright decline in the first quarter of this year, from a pace of 51% to 43%.

Still, it’s growth that most other companies envy, and growth that, from most other companies, would have investors salivating. Not Square, though. The chatter surrounding this storied stock — and it is a true “story stock” — has been all about the breakneck speed of its sales growth, en route to a swing to a real GAAP profit. When the pace slowed, the story crumbled.

Take a closer look at the company, however. The future still looks amazingly bright, and the market may be on the verge of mentally repositioning Square as something other than a story stock that needs unsustainable growth rates to drive unsustainable rallies.

Once that dust fully settles, SQ stock should become a solid, even if less volatile, prospect.

Square Outlook

It’s a reality that hasn’t eluded analysts even in the midst of some rather dramatic investors panic.

Though traders have driven shares down to their current price near $65, the consensus target remains just under $83. That’s still relatively close to its peak consensus target of around $88 in December of last year, before another wave of selling forced some analysts to at least acknowledge current price action.

Driving that rather persistent optimism is a growth streak that’s projected to remain in place for the foreseeable future. While the relative, comparison pace is slowing, on an absolute basis, the growth train continues to roll.

By the third quarter of this year, analysts expect positive GAAP earnings.

It’s not just wishful thinking either. Square has catalysts in the cards. Chief among them is ongoing growth of its Cash App. Barclays analyst Ramsey El-Assal reiterated this week the possibility that it could propel SQ stock higher, after saying in March: “Square’s vision is that consumers rely on Cash App, instead of a bank account, for services like bill pay, budgeting, investing, and lending, in addition to storing, spending, and sending money.”

Instinet’s Dan Dolev is bullish too, though for a different reason. He also noted in March: “With over 80% of large-sellers self-onboarding, we expect this positive trend to continue,” highlighting Square’s traction with bigger businesses.

Bottom Line for SQ Stock

Investors are slowly but surely figuring out the future can’t look like the past no matter how successful the company is. Though it’s taking time, the adjustment is being made.

That’s not to suggest such an adjustment is made in a straight line. Surely many traders will remain stuck in the old paradigm, while others are already valuing Square like an old-school name. It’s a paradigm that sets the stage for more volatility. That volatility is being exacerbated by the overall market’s uncertainty.

The fog is lifting though, and what’s starting to emerge is a company that’s still easy to own even if it’s not putting on a fireworks show.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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