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Is Square Stock a Buy Ahead of Earnings?

Square (NYSE: SQ) is set to report its fiscal first quarter earnings on Thursday after the bell. The fintech has a lofty valuation, but you should expect strong growth for many years to come.

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This story originally appeared on MarketBeat

Square (NYSE: SQ) is set to report its fiscal first-quarter earnings on Thursday after the bell. The fintech’s shares have nearly quadrupled since the start of 2020, and investors are wondering if there is an additional upside.

Depositphotos.com contributor/Depositphotos.com via MarketBeat

The fact that Square is trading at nearly 200x forward earnings indicates that a lot of growth is baked into the share price. But Square, it turns out, is the type of company that can see explosive revenue growth for a long time.

Square Had a Stellar 2020

Any discussion about Square’s long-term growth prospects has to start with Cash App. On the fourth-quarter earnings call, CFO Amrita Ahuja pointed out that, “In 2019, Cash App had only one revenue stream with $100 million in gross profit, and in 2020, we had four with approximately $100 million or more, each of which grew at over 100% year over year.”

Bitcoin was responsible for $97 million in gross profit, falling just short of that $100 million threshold, but up more than tenfold over 2019 levels. More on Bitcoin in a bit.

As of December, Cash App had 36 million monthly active customers, up 50% yoy. The company’s average customer acquisition cost is less than $5, which is good because a) Square hasn’t had to spend too much money marketing Cash App and b) if growth slows down, Square can pour money into marketing to re-accelerate user growth.

Moving to Seller, we see that Square got $1.51 billion in gross profit from this segment in 2020, up 8% yoy. That seems disappointing for a major part of a richly valued company, but remember, in-person transactions plummeted in 2020 due to the pandemic. In 2021 and beyond, the Seller growth rate should pick up.

Bitcoin is Booming

Bitcoin nearly tripled between October 1 and December 31, so it shouldn’t be surprising that Cash App made more than 40% of its 2020 Bitcoin gross profit in the fourth quarter. The price of Bitcoin didn’t go up much in January, but interest in the cryptocurrency – as measured by Cash App activity – increased a lot.

In 2020, more than 3 million Cash App users bought or sold Bitcoin. But in January 2021, more than 1 million users bought Bitcoin for the first time. The cryptocurrency is up more than 70% since the beginning of February – as of this writing – which indicates that Cash App’s Bitcoin gross profit could record a sequential increase in the first quarter.

In Square’s fourth-quarter earnings release, the company announced that it purchased 3,318 Bitcoin. The total purchase price was $170 million, so Square paid an average of $51,236 per Bitcoin. Square previously announced that it bought 4,709 bitcoins back when the price was a little over $10,000 per Bitcoin.

Here’s the deal:

You should disregard the direct impact of the Bitcoin investments on Square’s bottom-line. We’re talking about a few hundred million dollars of Bitcoin for a company with a $100 billion+ market cap.

But Bitcoin, as both a direct source of gross profit and a way to get people using other parts of Cash App, is very valuable to Square.

Square Has Long-Term Growth Opportunity

The mobile payments market is projected to grow at a CAGR of nearly 20% over the next five years. Square, as an industry leader, could easily grow at a much faster rate.

Moreover, there’s no reason to expect growth to grind to a halt after 2025. Even if it slows down a bit, we could be looking at an industry that grows at a double-digit CAGR for the 5-10 years after that.

How Should You Play Square?

Square, like any company trading at nearly 200x forward earnings, comes with risk. There is a good chance that Square will more than grow into its valuation, but a couple of bad quarters could torpedo the stock.

That said, the long-term risk-reward is favorable. And now seems like a good time to get in.

Looking at the chart, you can see that shares are getting support at $240, around the 50-day moving average.

 

 

In addition to the nice entry point, there is a good chance that Square, led by Bitcoin, will release strong Q1 numbers on Thursday.

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