Square (SQ) is among the large-cap tech stocks worth a look from investors right now. This San Francisco-based financial services and digital payments company is making the right moves in the fintech sector.
Square is among the leaders in payments infrastructure. Many investors have pointed to it as a way to play the accelerated transition toward omnichannel retail models for many small and medium-sized businesses.
Like other fintech stocks, the pandemic provided Square with a tailwind. Accordingly, those concerned about the rise of the omicron COVID-19 variant may like how Square is positioned right now.
Nonetheless, given all the uncertainty in the market, SQ stock is hard to forecast right now. Accordingly, I remain neutral on this company. (See Analysts’ Top Stocks on TipRanks)
Let’s dive into what’s behind the recent volatility with Square.
What’s Going On with Square’s Price Action?
The past few months have been volatile ones for investors in Square. This summer, the payments company saw significant volatility, surging to a new all-time high in August, only to fall approximately 25% to current levels.
Square’s growth prospects moving forward appear to be strong. However, investors appear to be concerned that the forward-looking growth prospects for Square and other fintech peers may not be as bright as initially thought.
One of the key drivers of SQ stock in this company’s rise to new all-time highs in August was sentiment around the company’s two ecosystems – Seller and Cash App. Revenues in Q2 came in at $1.96 billion (ex-Bitcoin). This represented a growth of 87% year-over-year, driven mainly by these two segments.
The company’s Cash App business provides users with an easy banking alternative to send and receive money. This has been touted as a competitor to high-profile platforms such as PayPal (PYPL), providing investors with a key growth thesis for owning this stock.
However, Square’s Q3 numbers have disappointed, to say the least. Slowing growth for Square’s Cash App translated into both an earnings and revenue miss.
It appears the “return to normal” we’ve seen coming out of the pandemic has slowed growth for digital payments companies substantially faster than analysts expected. Whether this will continue, given the rise of yet another variant, remains to be seen. However, for now, Square’s growth outlook appears to be muddied by these recent results.
Could Buy Now Pay Later Change the Discussion?
One of the big deals that propelled SQ stock so high this summer was the announced acquisition of the Australia-based, buy now pay later (BNPL) service, Afterpay. The recent approval of this $29 billion takeover earlier this month has suggested to investors that Square isn’t slowing down in terms of its aggressive approach to generating growth.
Indeed, if Square’s core businesses are under pressure, the company has shown a willingness to acquire the growth investors desire. For long-term growth investors, this can be a good or a bad thing. Indeed, questions about whether Square overpaid for this deal may overshadow the ultimate revenue impact Afterpay could bring.
That said, there is a lot to like about the growth prospects of the buy now pay later segment. Afterpay’s revenue growth of 92% since 2019 is remarkable and something Square investors certainly like to see.
The hope is that Square can integrate Afterpay’s service into its platform to juice organic growth. Whether this growth materializes or not is a big question. However, an argument can be made that synergy generation is real as a result of this deal.
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. The average Square price target of $306.48 implies 44% upside potential.
Analyst price targets range from a low of $210 per share to a high of $380 per share.
Bottom Line
This year has been a very volatile one for investors in Square. A leading fintech provider in the payments space, there’s certainly a lot to like about where this company is headed over the long term.
However, market-related concerns have not provided much in the way of tailwinds for this stock as of late. It remains to be seen how Square will perform in 2022, should growth continue to slow.
Accordingly, it appears the market is generally taking a wait-and-see approach with this stock. That said, an argument can be made to the upside and downside with this company. Investors looking to bet on where growth is headed in the medium-term may look to Square as a bellwether of this trend.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.
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