Why the Outlook of Square Stock Is Still Bright

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After nearly reaching $75 per share, Square, (NYSE: SQ) stock is changing hands for around $65 per share. Markets became less bullish on SQ stock after SQ provided weak Q2 guidance.

Square's AI platform can boost SQ stock longer term

Even though its Q1 results beat analysts’ consensus outlook, the payment processing firm needs to demonstrate that its initiatives such as its latest partnership with Postmates will be fruitful. With a market capitalization of $28 billion and a forward price-earnings ratio of almost 60, SQ stock is more suitable for growth investors. So how significant is its latest partnership announcement?

Deal with Postmates

Postmates is a network of couriers who deliver food, groceries, and alcohol locally. Following the deal with Postmates, Square customers can use Postmates’ couriers to get goods to customers who place orders with SQ.

Square is no stranger to the delivery business. It owns food delivery services firm Caviar, a company it bought in 2014. Yet Postmates will catapult Square’s addressable market size because Postmates has a presence in  more than 1,000 cities.After  raising $100 million in January, Postmates is valued at $1.85 billion.

Second-Quarter Guidance

Square needs to grow its addressable market because it lowered its Q2 outlook. It forecast earnings of $0.14 – $0.16 per share of SQ, below the consensus forecast of 18 cents per share of SQ stock . But the top end of the company’s full-year revenue guidance range was raised to $2.28 billion from $2.25 billion previously.

Many investors clearly sold SQ stock following the guidance because they felt uncertain about SQ’s near-term outlook. Yet the company’s full-year EPS guidance of $0.74- $0.78 per share was unchanged, indicating that SQ lowered its Q2 EPS guidance because it expects to delay recognizing some of its revenue by a quarter or two.

Strong Momentum in Q1

Despite the deceleration of Square’s business in Q2, the company’s  growth in Q1 still justifies the valuation of SQ stock. Specifically, its seller and cash app ecosystem drove total year-over-year revenue growth of 43%.

The Valuation of SQ Stock

The 22 analysts covering SQ stock are very bullish on it and have an average price target that is about 20% above the stock’s recent $66 share price (per Tipranks). If investors think that the company’s revenue will grow between 25% and 45% annually for the next five years, a 5-year DCR Revenue Exit model suggests SQ stock could have a fair value that is about 30% above its current price.

The Bottom Line on SQ

The  downtrend of Square stock  is puzzling because its peers, namely PayPal (NASDAQ:PYPL), Visa (NYSE:V), and MasterCard (NYSE:MA) have all traded higher recently. But the company’s near-term slowdown is scaring buyers away and creating selling pressure on SQ stock.

Investors who missed the rally that took Square stock to $100 in October 2018 have another chance to pick up SQ at a decent level. Consider initially buying a small number of shares of SQ. And from there, average down or up over the next few months.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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