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Square (NYSE: SQ) has been one of the top-performing stocks in 2020. Shares of this large-cap fintech giant have gained close to 250% year-to-date which means a $1,000 dollar investment in Square at the start of this year would have returned close to $3,500 today. Comparatively, the S&P 500 Index has returned 14% in 2020.
But past returns don’t matter much for current and prospective investors. Let’s take a look at why Square remains a top bet for 2021 and beyond.
Square is a fintech disruptor
Square initially targeted small and medium businesses allowing them to make digital payments. In the last few years, its Cash App has gained significant traction among retail users that enables them to transfer money as well as make payments. It has also entered the brokerage business and offered users a platform to purchase free trades as well as fractional shares.
In 2019, the Square Card was launched targeting SMEs. The Square Card is a debit card where businesses in Square’s seller network would be able to make payments by leveraging their revenue streams. The businesses can do so without having to open a bank account. Square confirmed sellers spent close to $250 million on the Square Card in Q3.
There is a good chance that Square will further diversify its business segments by loaning money to businesses. As the loan business gains pace, investors can expect Square’s revenue growth to accelerate over the next few years.
In the last 12-months, Square sales were close to $7 billion. In Q3, revenue growth stood at 139% while Wall Street has forecast sales to grow by a stellar 313% to $9.4 billion in 2020.
What are the key metrics for Square?
Square’s Cash App sales were up a monstrous 574% year-over-year in Q3 while Seller revenue grew by just 5%. The rise of Bitcoin and other cryptocurrencies drove sales for the Cash App and even if we don’t account for crypto sales, revenue growth for the Cash App was 174%.
Square is one of the most innovative companies in the fintech space and has massive potential to continue to generate outsized gains. Between 2012 and 2019, the gross payment volume on the Square platform rose at an annual rate of 49% from $6 billion to $106 billion.
The Cash App’s monthly active users have grown to over 30 million, up from 7 million at the end of 2017. Now, Square has agreed to acquire Credit Karma’s tax preparation business for $50 million which will allow it to expand its user base enabling the company to cross-sell services over the long-term.
Square is creating an enviable ecosystem for users as well as for small businesses. It can easily leverage data from its seller network, Cash App users, and its upcoming acquisition of Credit Karma’s user base to expand its suite of products and services.
The verdict
We can see Square stock should be on the radar of most growth investors. It's valued at a market cap of $98 billion indicating a forward price to sales multiple of 10.4x which might seem expensive but growth stocks trade at a hefty premium.
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