Stocks to buy

Growth and technology stocks have recently been stung by the COVID-19 outbreak, and Square (NYSE:SQ) stock hasn’t been immune. However, investors would do well to take the long view of this fintech giant, and not be hasty because of short-term headlines that have nothing to do with Square’s underlying fundamentals.

Are Expectations for Square Stock Too High Before Earnings?

Source: Jonathan Weiss / Shutterstock.com

Even with the recent macro-induced weakness, SQ stock entered Tuesday February 25 with a year-to-date gain of 28.21%, supporting the notion that shares offer upside thanks to low interest rates and the potential for revenue growth in 2020.

Broadly speaking, Square is viewed as the leader of in mobile point-of-sale (POS) gadgets and gear and an increasingly formidable competitor in POS for land-based businesses. Those remain brand recognition and revenue drivers as well as possible catalysts for margin expansion, but as investors that actively follow SQ stock know, there are more chapters in this book.

The Cash App Catalyst

As Sean Emory, founder and chief investment officer (CIO) of Square investor Avory & Company, points out, Cash App is an evolving, growing part of the Square thesis:

“Cash App continues to progress nicely as not only a way to send your friends and family money, but one which is clearly becoming an ecosystem of financial solutions,” said Emory in comments emailed to InvestorPlace. “Over the last 18 months, Cash App has incorporated stock investing, bitcoin investing, Cash Boosts for rewards and a physical debit card for broader usage.”

On a standalone basis, both POS and Cash App are compelling, but if Square can effectively realize synergies between the two offerings, that could prove significant for investors. Per Emory:

“Very few companies in the world have developed a two-sided ecosystem like Square has, and I believe there’s significant runway to expand them both on a stand-alone basis, while also figuring out ways to combine ecosystems,” said Emory. “From a valuation standpoint, I think most investors continue to underestimate the long term potential with both ecosystems.”

Square’s ability to capitalize on new growth frontiers and monetize those opportunities is critical given the rich multiples the stock sports. At 84x forward earnings and 27.58x book value, Square is priced like a growth stock. The company merits that label because, in addition to Cash App, there are avenues for margin and multiple expansion, including ancillary services such as Instant Deposit and Square Capital.

“Square’s non-transactional business (i.e., Capital and deposits) is more profitable and makes up a significant portion of total revenues,” said Emory.

Square Capital, the company’s lending business, is more efficient and less capital-intensive than a traditional bank’s business lending arm because would-be borrowers are already using Square POS and other services, giving the company unrivaled insight into borrowers’ creditworthiness. Additionally, it seems the markets may not yet be fully appreciating this opportunity as it pertains to SQ stock.

“We believe the market underestimates the flywheel of Square offering loans to successful companies, therefore accelerating their growth, which then drives more transactional revenue overtime,” said Emory.

Bottom Line

With the coronavirus issue lingering, Square could be affected over the near-term simply because some investors don’t want to embrace the risk profile of growth stocks.

That could spell a buying opportunity because Square depends on the U.S. for the bulk of its revenue and has compelling products and services that aren’t fully baked into the stock price.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities. Avory & Company is a Square investor and Emory’s comments here are not recommendations to buy or sell any securities.

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