Square (NYSE: SQ) has taken investors on a wild ride over the past year or so, but don't sell just because the stock rebounded.
If you take a glance at Square's chart over the past year, you'll see that it looks like a roller-coaster track. Square's share price was about $45 a year ago, and thanks to accelerating growth in key areas of its business, the stock steadily climbed to $100 by late September.
Then, as fears of an economic slowdown gripped the stock market, Square was hit very hard, dropping to about $50 at its December low.
To be fair, the decline was fueled by a couple of business-specific factors, in addition to general market volatility. CFO Sarah Friar left the company, and anyone who has been following Square for a while knows that she was an absolute rock star in that role. And, many analysts took a negative view toward Square's first venture into consumer credit with its Installments product.
As you can see, the stock has rebounded a bit lately as recession/slowdown fears have eased. As of Feb. 8, the stock is trading right around $72, still up by 73% over the past year. However, don't be so quick to sell just because of this rally.
Image source: Square.
A great long-term business strategy
If you're thinking about cashing in on Square's recent rally, I strongly urge you to take a step back and consider the long-term prospects for the company. The vast majority of its revenue potential remains untapped.
Its core payment processing business still has tons of addressable opportunities, for starters. The current annualized gross payment volume of $90 billion through Square's hardware represents less than 2% of all U.S. card payments, and Square has done a great job of bringing larger businesses into its ecosystem through its newer hardware offerings. And this doesn't even take international opportunities into account, as the company operates in just a handful of countries around the globe.
The Square Capital business lending platform, the Square Installments consumer credit product, and other Square business lines are still in their relative infancy as well.
Furthermore, while Square's business customer base has grown tremendously, don't forget about the consumer-facing side of the business. The company's Cash App recently surpassed Venmo in terms of total downloads, and the platform has millions of active users. Keep in mind that this user base is largely unmonetized at this point, but it creates a ton of opportunities to cross-sell future Square offerings. And if former CFO Sarah Friar's vision for the company materializes, Square could ultimately offer savings and checking products, an investment platform, personal lending solutions, and more to this massive customer base.
Finally, Square is doing a great job of strengthening its ecosystem. The recently launched business debit card is a great example of this. Not only does it differentiate the company from other payment-processing providers by allowing merchants immediate access to their money, but it takes the innovative step of giving cardholders a 2.75% discount at other Square merchants, encouraging Square's merchants to support one another. I follow the card payments industry closely, and I can tell you that this discount/rewards rate from a debit card is unheard of.
Don't sell just because the stock rebounded
If you held on while Square was in free fall in late 2018, it could be tempting to cash in. After all, Square has rebounded by 38% since its Christmas Eve low -- that's a stellar gain in just over a month.
Nobody has a crystal ball that can predict any company's future, and I'm certainly not an exception. However, Square's growth rate, untapped market potential, and millions of yet-to-be-monetized users in its ecosystem are telling us that this company's best days are ahead of it. I first bought Square at just over $11 per share in 2016, so I'm sitting on a gain of more than 500%. I'm not planning to sell any of my shares, and would suggest you think twice before selling.
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