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Square Stock is Overvalued, But It Could Head Higher

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Thomas Niel
·4 min read
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Cautious investors may be nervous about buying into Square (NYSE:SQ) at today’s prices. Square stock has surged almost five-fold since April. But, as long as its growth story stays in motion, expect valuation concerns to remain secondary.

Square stock
Square stock

Source: Piotr Swat / Shutterstock.com

Why? Chalk it up to the strong performance of its customer-facing Cash App business. Now making up two-thirds of its revenue, this platform has moved beyond just peer-to-peer payments.

The platform has found success offering trading of cryptocurrencies like bitcoin (CCC:BTC). Its recent move into stock brokerage services has shown success as well, and could benefit from the recent controversy surrounding Robinhood.

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What about Square’s Seller Ecosystem (point of sale, Square Capital) segment? As seen in its last quarterly results release, this unit has continued to grow, albeit moderately. But this could pick up going forward. Why? The “digitalization of payments” megatrend (more below) could start to accelerate post-Covid. In addition, this segment could perform better than expected, if we get over the pandemic in the coming year.

The Cash App segment may be getting the most attention. But, the Seller Ecosystem remains an important part of this fintech supermarket.

Of course, it’s not guaranteed that good times will continue for Square stock. Given its frothy valuation, shares could see a downsized pullback if the stock market starts heading in the wrong direction.

But, outside of general market risk, there’s little on the horizon to make this “story stock” fall out of favor with investors. In short, a good chance shares continue to trend higher.

Square Stock, and the Runaway Success of Cash App

The future looks bright for Square, thanks to the runway success of its CashApp segment. As InvestorPlace’s Louis Navellier discussed Jan. 29, CashApp has delivered triple-digit growth in the past three quarters. We have yet to see results for the quarter ending Dec. 31. But it looks likely we’ll see a fourth consecutive quarter of blockbuster results.

Like I said above, it’s more than just peer-to-peer payments that’s fueling growth for CashApp. The company has also found success with its crypto and stock trading services. With the controversy surrounding Robinhood after the GameStop (NYSE:GME) “short squeeze saga,” CashApp’s brokerage growth could speed up, as longtime Robinhood users move over to this other retail-friendly platform.

On the other hand, there’s no guarantee there will be a mass exodus from Robinhood. In fact, there’s evidence that all the attention surrounding the GameStop affair has helped to increase downloads of the popular retail brokerage app.

Yet, this possible outcome played a role in Mizuho Securities’ latest “buy” rating on Square stock. Mizuho’s analyst team is not only bullish on CashApp’s prospects, but also the potential of its overlooked Seller Ecosystem unit.

Speaking of this unit, there are two potential developments that could improve its results. Both in the coming year, and throughout the 2020s.

Why Digitalization of Payments Will Boost Its Legacy Business

The past year has been a banner one for Square. However, far from just seeing a short-term boost from pandemic-related tailwinds, the long-term appears bright as well for Square.

Analysts at Cowen recently broke down how the “digitalization of payments” megatrend is set to accelerate in a post-Covid world. In other words, the eventual move to entirely cashless transactions. This may mostly benefit Square’s fintech rival, PayPal (NASDAQ:PYPL), as well as legacy payment giants like Mastercard (NYSE:MA) and Visa (NYSE:V).

But, Square stands to gain from this as well. Large companies may be early adopters of all-cashless point-of-sale transactions. But, over time, smaller businesses like restaurants will likely make this shift as well.

Besides this longer-term catalyst, there is also the Covid recovery factor to consider as well. InvestorPlace Senior Investment Analyst Luke Lango mentioned this on Feb. 1, when he made the case why Square stock is headed to $300 per share. In short, as in-person businesses like restaurants and retailers get back to normal in 2021, the Seller Ecosystem segment should see a strong performance over the next few quarters.

Outside of a Market Crash, Shares Could Continue to Climb

In my book, Square looks overvalued. All it will take is one hiccup for this top -performing stock to reverse course. Yet, so much remains on its side. Outside of an overall market correction/crash, I don’t see shares heading lower anytime soon.

Instead, as more positive news comes out (such as its upcoming Q4 earnings release), Square stock will likely head towards higher price levels. Tread carefully, but this remains a solid opportunity for growth-minded investors.

On the date of publication, Thomas Niel held a LONG position in bitcoin.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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