The transformative potential of Square (NYSE:SQ) drove SQ stock to record highs last year. However, a market plunge and concerns about overvaluation wiped out about half of its value in late 2018. Slowing growth has again cooled off Square stock in recent weeks.
However, as SQ stock fell, Square continued to open new lines of businesses. These new ventures have begun to turn much of Square’s potential into reality. Though SQ stock may rise slowly in the near-term, its potential to transform payment systems should lead to colossal gains by Square stock in the coming years.
Square Grows Amid the Stagnation of SQ Stock
SQ had become a confusing stock in many respects. Even as payment stocks such as PayPal (NASDAQ:PYPL) and card equities such as Visa (NYSE:V), Mastercard (NYSE:MA), and American Express (NYSE:AXP) moved higher at the beginning of 2019, Square stock began to steadily fall in February.
Back in May, I encouraged investors to buy SQ near the $65 per share level. The turnaround of Square stock began in early June after SQ stock briefly dipped below the $60 per share level. At that point, the equity found its floor and started to move in the other direction. Today, it trades at around $71 per share.
I think two numbers InvestorPlace columnist Luke Lango pointed out make the case best for SQ stock. Specifically, Lango noted that SQ’s addressable market is estimated at $20 trillion, while the transactions Square registered last year were worth $85 billion. The latter figure equates to about 0.35% of the value of all global transactions, an increase from 0.23% in 2016.
Investors should also note that Square only operates in five countries right now. As SQ moves into new markets, its growth in existing geographic markets and its expansion into new ones should continue to drive that percentage higher.
Square Redefines the Payments Environment
SQ began as a credit-card-processing company. It has now branched out into several other payment-related areas. Square Payroll and Square Capital offer payment services and loans. Its Caviar unit has integrated delivery and takeout orders.
However, Square’s highest potential innovation might be its Cash App. Square hopes consumers will treat its Cash App like a bank account. If the initiative succeeds, Square could potentially disrupt the banking industry in the same way Netflix (NASDAQ:NFLX) upended the video store and cable TV industries.
Anyone who has studied the rise of the largest names in tech knows they have one thing in common: an ecosystem. SQ has followed the lead of Apple’s (NASDAQ:AAPL) iOS, Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Android, and the retailing and artificial intelligence (AI) ecosystem of Amazon (NASDAQ:AMZN). Much like these tech titans, I believe SQ has taken steps that will turn it into a payment conglomerate.
The Owners of Square Stock May Need to Be Patient
However, despite Square’s potential, investors need to understand that it may take time before SQ stock reflects the company’s possibilities. The forward price-earnings (PE) ratio of SQ stock stands at 62. While that makes SQ expensive by most measures, the fact that analysts, on average, expect its profit to jump 62% this year helps to justify the stock’s elevated multiple. That growth will probably decelerate somewhat in the future. Still, analysts predict an average earnings increase of 46% per year for SQ over the next five years.
Also,based on charts, SQ stock has appeared to be range-bound for the last year. Since December, SQ has risen above the $50 per share level. The most recent drop only took it to $60 per share, so it may be poised to slowly move higher going forward. However, it has a long way to go before it reaches its all-time high of $101.15 per share. But if SQ stock returns to that point, it may again look expensive and give back some of its gains.
SQ stock will probably not rapidly rally until it rises above its all-time high. However, for those who exercise patience, I think SQ stock will gradually pay off as the company’s market share expands and more consumers enjoy the benefits of its ecosystem.
Concluding Thoughts on SQ Stock
Even if SQ stock continues to climb slowly in the near-term, Square’s potential to redefine the payment landscape will make it a huge winner over the long-term.
Square stock has fared relatively poorly as other payment stocks have steadily risen in 2019.However, even with its growth slowing, Square looks poised to change the payments landscape. It has put itself in this position by creating the iOS or Android of payments ecosystems. Once a credit-card-processing company, Square now has an ecosystem that could threaten traditional banking.
SQ stock appears stuck in a range. Given the earnings increases needed to push SQ stock to record highs, I only expect the stock to rise slowly in the near-term. However, because Square’s growth will make it an increasingly essential part of the payments landscape in coming years, I think Square stock will climb meaningfully over the longer term.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.