Square (SQ) is a diversified fintech company operating an ecosystem of multiple services.
Primarily, Square enables businesses to accept card payments, including those for which such a service was previously inaccessible. Over the years, the company has introduced a variety of solutions for businesses to thrive through innovative technology, gaining fantastic traction in terms of growing its user base and developing its revenues.
The company’s most valuable asset, in my view, is Cash App. Square introduced it in 2013, aiming to build an ecosystem of financial products and services to support individuals in managing their money. Since then, it has grown exponentially, now numbering over 30 million monthly active users.
While the company continues to grow rapidly, especially since integrating crypto in its Cash App ecosystem, the stock has declined substantially lately.
Shares have been, in fact, treading towards their 52-week-low levels over the past couple of months. In my view, the company remains well-positioned to benefit from the ongoing macro tailwinds in the fintech industry.
The recent sell-off may have opened a rare opportunity for investors to initiate a position or add to their existing holdings, as Square has rarely been as cheap as it currently is. Hence, I am bullish on the stock.
Q3 Results: Growth Remains Robust
Square’s Q3 results came in very strong, with the company achieving $2.03 billion in revenues excluding Bitcoin, an increase of 45% year-over-year, or ~4% sequentially.
Including Bitcoin, revenues came in at $3.84 billion, 26.7% higher year-over-year. Specifically, Cash App revenues grew to $578 million, featuring $485 million in gross profits. Not only does this imply an impressive gross profit margin of 83%, but gross profits grew by a solid 33% year-over-year.
Additionally, during Q3, Square launched Cash App Pay, enabling a new commerce experience for Cash App customers by creating a convenient integration between the Cash App and Seller ecosystems. During the quarter, sellers’ gross profit grew 48% versus Q3 2020 to $606 million, and that was before the integration. Hence, it would be quite reasonable to expect an acceleration in Square’s top line going forward from this segment.
Square is also constantly enriching its ecosystem, unlocking multiple synergies and achieving economies of scale. In August, the company agreed to acquire Afterpay, a global buy now, pay later platform with more than 16 million consumers and approximately 100,000 merchants as of June 2021.
With Afterpay integrated into the rest of its ecosystem, Square projects to unite two interconnected businesses towards what I would call the “super app” in the fintech industry. Following the integration, I don’t believe any other company would offer a more compelling product and service for consumers and merchants alike. At least in the current state of the market.
The stock is trading at just 5.5 times its FY 2021 sales, which is nearly an all-time low multiple for the company, Square offers compelling upside — especially considering the company’s ongoing developments.
Wall Street’s Take
Turning to Wall Street, Square has a Moderate Buy consensus rating, based on 17 Buys, four Holds, and one Sell assigned in the past three months. At $306.48, the average Square price target implies 42.1% upside potential.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Square through stock ownership.
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