Is SQ Stock Overvalued?

Square Inc (NYSE:SQ) is a San Francisco-based financial technology company that grew in leaps and bounds before the economy came to a screeching slowdown and skyrocketed thereafter as the world turned ever more digital.

From a 52-week low of $32.33 at the outbreak, SQ share price rallied to new heights of over $200 per share within months, leading to a market cap of around $100 billion and causing analysts to question if SQ stock is overvalued?

The company founded by Twitter CEO Jack Dorsey was founded in 2009 and filled a gap traditional banks had ignored. It helped kickstart the mobile payment revolution and drew the ire of rival Paypal Holdings Inc (NASDAQ:PYPL) in the process.

Contactless payments, curbside pickup, delivery, and ecommerce rose as necessary options for any business to remain operational. The economy may reopen in 2021, but the migration to mobile and digital payments was accelerated perhaps indefinitely.

Investors are now left with the option to walk away with their up-to-700-percent return on investment or continue holding for even more growth in 2021. It’s time to check the receipts to see which direction this stock may head moving forward.

Why SQ Stock Went Up

Square (SQ) was well-placed for the economic shock that derailed so many other businesses during 2020.

The company offers a variety of financial tools and services for both business and personal use that became essential to entrepreneurs looking to keep their businesses afloat.

Net revenue jumped by 148 percent, and this caused Square share price to skyrocket. This leap in growth was fueled by both its Square app for merchants and Cash App, which allows anyone to send money to each other. In fact, Cash App’s year-over-year gross profit tripled in 2020.

This caused a flurry of investors to buy into the stock and drove prices way up throughout the entire year. The company exponentially outperformed the overall finance sector, which highlighted the reality that FinTech companies could overtake traditional banks like Wells Fargo (WFC) in the future.

Square Financials: Sky High P/E Ratio, Hugh Growth

Square Inc raced to all-time highs as its market capitalization closed in on $100 billion, resulting in a sky high P/E ratio of over 300x.

The catalyst was a November 3 earnings report of $0.34 per share, or $3.03 billion income for the quarter. That number more than doubled the consensus estimate of $0.16 per share, and even its GAAP adjusted earnings of $0.17 outpaced estimates.

The company’s revenue for the 2020 fiscal year was $5.7 billion, a massive increase from $2.09 billion in 2019. It has two main revenue segments – Cash App and Business.

Cash App covers P2P digital payments, while Square’s legacy payments platform includes mobile card readers, POS platforms, business financial services, and more. The company can also handle payroll services for tech-savvy businesses

Gross revenues and profits grew in both segments compared to 2019, and the ability to buy Bitcoin generated over 1,000 percent revenue increases in the third quarter alone. That prompted competitor PayPal to pull a complete 180 in its cryptocurrency policy in late October to enable Bitcoin trading.

Now that it has forward momentum, the company can expand into more financial services to work on taking market share from both FinTech and legacy financial companies. But some bearish investors think it may be time to sell.

Is SQ Valuation Too High?

The biggest wild card to Square’s continued growth is another round of stimulus payments. The CARES Act was instrumental in keeping money flowing in the economy and fueling growth in 2020. It’s unclear how long that growth can be sustained into 2021 with so much uncertainty surrounded a global reopening.

This could lead to several quarters of lost investments and a more panicked market if governments don’t step in to provide economic relief payments in some form.

Otherwise, consumers’ purse strings may tighten as the winter drags on, leading to stale growth and less investor confidence. While Square has plenty of growth potential, it may already be priced to perfection, and investing now carries risks of SQ stock price dropping.

Ironically, another wave of coronavirus infections bodes less ominously for the company’s overall bottom line as it does for so many other less fortunate companies who rely on customers walking in the front door to earn a buck.

Contactless payments, deliveries, and other digital payment options enabled by Square’s tools are likely to continue seeing increased demands.

And as more businesses reopen, they may continue to adopt a tech-driven approach to prepare for the next pandemic or other global event. There’s also a slew of rivals to consider.

Will SQ Stock Drop?

Square isn’t the only FinTech company on the block, and PayPal is only one problem. Companies like Stripe, Shopify (SHOP), Amazon (AMZN), Intuit, and WePay are hot on the company’s heels to enable seller payments.

Even Facebook (FB) allows P2P payments through its apps, although its size isn’t big enough to threaten any of these companies, yet.

And there’s the legacy financial industry, from banks like JPMorgan Chase (JPM) to payment processors like Visa (V), who all want to gain traction from the increased digitization of the economy. The overall financial industry lagged behind Square, and PayPal (PYPL) isn’t the only one pivoting to respond.

There’s a risk of Square’s stock both dropping and underperforming the overall market as the post-pandemic economy continues. Other companies are pulling into its lane to mimic its successes, and it’ll need to spend big to maintain its lead while fending off rivals.

Still, the general consensus is that the company’s payments volume and user base will continue to grow and provide higher profits for months and years to come.

Is SQ Stock Overvalued? The Bottom Line

Square is a digital payments company that experienced big gains in 2020. The mobile payment revolution was slow to be adopted in the 2010s. Although the technology was widely available, user adoption was slower than expected. However, the pandemic changed everything and accelerated Square’s growth trajectory.

The company’s financials year over year were excellent, but it’s likely to slow over the next year as the economy returns to normal. Or rather if – there’s no guarantee the way we lived in 2020 won’t become the new normal for the next two years.

Major events like SXSW and CES are still digital into next year, and it may be hip to be Square for another year to come.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.