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Thursday, February 9, 2023

Don’t Short the Future, Buy Square Stock Instead

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Square (NYSE:SQ) has been on one heck of a run lately, but I don’t think the music is about to stop now. SQ stock has recently dipped from the highs, coming in from $170 to a recent low near $135. 

Square, Inc. (SQ) logo seen displayed on smart phone. Square, Inc. is a financial services, merchant services aggregator, and mobile payment company

Source: IgorGolovniov / Shutterstock.com

That pullback actually brought Square back to its pre-earnings trading levels from July. That gave investors a chance to buy the dip despite the company’s solid quarterly results

The thing about SQ stock is also “the thing” about almost all tech stocks in general, which is that it’s not impervious to the overall market. While that can sometimes be a good thing — like when the Nasdaq is barreling higher — it can also be a “bad” thing when the market is correcting lower. I say “bad” in quotes because it’s all about perspective. 

Most investors don’t like to see their holdings go down; they would prefer a linear rally. But that is simply not reality, as you know. While the severity of these downdrafts are impossible to predict on a consistent basis, they give investors a chance to buy some of the best stocks out there, one of which I believe is Square. 

Why Buy SQ Stock?

There are three things I really like about Square:

  1. It’s situated in the future of a cashless society
  2. The company still has revenue growth
  3. It gives investors exposure to cryptocurrencies 

The world has been moving toward a cashless society for a long time. That isn’t to say paper money will have no place in the near-term future — of course it will — but the trend is not its friend. 

The secular theme is a shift away from cash and check and toward credit and debit. That has been in play for many years now and is not a result of the novel coronavirus. However, due to the virus, it has helped accelerate this trend as a card is preferred over physical cash (and as online transactions increase). Just have a look at the charts below, showing cashless transactions worldwide. 

Among one of the biggest concerns from the novel coronavirus was the impact it would have on small- and medium-sized businesses. Lockdowns, lower foot traffic and a drop in sales could crush these businesses, eventually killing them off. 

The fact that we’re not seeing Square die off despite a deep (albeit sharp) recession is a very good thing. A very good thing. 

Growth and Crypto

Amid the coronavirus outbreak, SQ stock was crushed. Again, that was due to concerns about the economy. In the previous quarter, revenue grew more than 60% year-over-year to $1.92 billion. 

That’s great news for bulls who are looking for growth at a time where other companies are struggling to grow. However, there is a caveat. When excluding bitcoin (CCC:BTC) revenue, total net revenue came in at $1.05 billion. That was flat year-over-year. 

Some investors would ask why management would exclude this revenue and what point it’s trying to make. For me, I see it as somewhat of a positive. While Square’s business did not grow (last quarter), it’s also not under extreme pressure. One would think that, given the fastest economic decline we’ve ever seen, Square would have been hammered in the quarter. For many, that makes it a safer investment and helps solidify Square’s staying power over the long term. 

It also highlights the strength in bitcoin. 

Some investors are hesitant to classify bitcoin revenue as true revenue. With just $17 million in gross profit on $875 million in revenue — some investors simply consider this revenue as “pass through volume” — that’s a fair argument. 

But to me this highlights the popularity of Square’s Cash App, where the transaction is generated. As Cash App gains in popularity, that’s a net positive for Square even if the gross profit figures remain low. 

At the end of the day, Square’s traditional business isn’t breaking at a time when it seems like it should. At the same time, it’s gaining momentum in its Cash App platform and its cryptocurrency business. Long term, it’s hard not to be bullish on SQ stock. 

Bottom Line on Square

At the end of the day, investors are faced with a company that has solid dependability in its core business and exciting growth opportunities in its younger business units. It would be foolish to think that Square’s core business will not rebound with the economy (and with the holidays not too far off). 

Combine that with Square’s improving financials, exposure to cryptocurrencies and its position in a secular shift, and I don’t want to bet against this name long term.

Add the dip in SQ stock for investors to buy and this one looks good, even if it does decline further in the short term.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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