Is Square stock a buy?

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Good news for Square (NYSE: SQ) came on Nov. 29 when CEO Jack Dorsey announced he would step down as the CEO of Twitter (NYSE: TWTR). For several years, he has run both Square and Twitter simultaneously.

A full-time focus on Square could enhance the fintech stock’s already-robust growth. The question for investors is whether that makes Square stock a buy now. 

Dorsey’s new focus and Square stock

Most of the news of Dorsey’s departure focused on its effects on Twitter but provided little coverage of how Square might be affected. An initial spike in Square’s stock price on Nov. 29 also dissolved quickly as an intraday high of nearly $221 per share led to a close at $212.87 per share, a gain of 0.4%. 

Despite the tepid reaction, Dorsey’s decision to focus on Square looks like the right call. Since launching its initial public offering (IPO) in late 2013, Twitter stock has experienced a net gain of about 2%. A 75% drop in the middle of the 2010s hampered the long-term performance and resulted in Dorsey’s return to the helm at Twitter. Conversely, Square stock has fared much better, rising more than 1,500% since its 2015 IPO.

More potential to tap

Moreover, Square has nearly reached a $100 billion market cap despite serving only seven countries. This means that it has not entered most of the developed world, let alone the more than 200 countries served by arch-rival PayPal.

Also, it competes with PayPal’s Venmo in the consumer market with its Cash App payments platform. Adding Bitcoin (CRYPTO: BTC) trading capabilities before Venmo enabled cryptocurrency trading also helped boost Cash App. Furthermore, its purchase of AfterPay will bring “buy now, pay later” to both Cash App and its Square ecosystem.

Those consumer-oriented offerings have not changed Square’s business focus as the newly opened Square Bank serves only enterprises, as do functions such as Square Register and Square Payroll. Additionally, its new countries, such as France, have thriving, small-business communities, and this emphasis could expand across the Eurozone as it prepares to enter Spain in early 2022.

The financials and Square stock 

These moves have taken Square’s revenue in the first nine months of the year to $13.6 billion, 114% higher than in the first three quarters of 2020. Nonetheless, since accounting rules force Square to log Bitcoin payment volumes as revenue, actual revenue was closer to $5.7 billion during this time.

Still, net income for the first three quarters came in at $243 million, up from a loss of $81 million in the first nine months of 2020. Limiting the growth of operating expenses during the period to 52% allowed the company to turn an operating profit, leading to a positive net income.

Despite the growth in revenue and earnings, the stock trades at approximately the same level as it did one year ago. Investors sold off the stock in recent weeks as many growth stocks have fallen. Its valuation may cause concerns as the company trades for about 200 times earnings. While the price-to-sales (P/S) ratio stands at just under seven, the stock sells for about 14 times sales when not counting Bitcoin payment volumes.

Despite the turn to profitability, consensus estimates call for earnings growth of only 9% in fiscal 2022. Such a growth slowdown could make its current valuation challenging to justify.

Should you consider Square stock?

The long-term investment thesis for Square remains intact. Jack Dorsey’s new, full-time commitment to Square bodes well for its future. Furthermore, the fact that it can reach a $100 billion market cap with a presence in only seven countries indicates it has only begun to tap its potential.

Nonetheless, investors need to watch the valuation. While Square appears on track to register substantial revenue increases, an earnings-growth slowdown could continue to hamper the stock. While it may not be too late to buy Square stock, it could mean the stock remains stagnant until signs of faster earnings growth begin to appear. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is Square stock a buy? appeared first on The Motley Fool Australia.

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Will Healy owns shares of Square. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Square. The Motley Fool Australia has recommended PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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