Square (NYSE: SQ) On Track To Retake All Time Highs

As equity markets look set to begin reversing four straight weeks of losses, shares of Square (NYSE: SQ) look like they want to end the month as they started it, at all-time highs. It’s been a spectacular six months for the $70 billion payments company who’ve been in prime position to capitalize on the huge growth in e-commerce.

Investors who were unable for whatever reason to pull the trigger back in March must be kicking themselves now as we head into the fall. After trading sideways for the better part of two years, the stock was stung badly with the initial onset of COVID-19 and fell 60% in just three weeks.

However, just as we saw with the likes of Amazon (NASDAQ: AMZN), Shopify (NYSE: SHOP) and PayPal (NASDAQ: PYPL), as the first shockwaves of the pandemic dissipated, Wall Street fell in love with anything related to online retail. With Square shares up 390% since then, it’s hard to know if there’ll ever be such a bargain to be had again.

That being said, they did fall 20% from all-time highs at the start of September but have been gaining momentum in the weeks since then and are back to within 5% of their closing all-time high.

The Solution For Small Businesses

The San Francisco headquartered company, founded by Twitter’s (NYSE: TWTR) Jack Dorsey, markets itself as the go-to payment tech solution for small businesses. If you’ve bought a cup of coffee recently and the barista has flipped the point-of-sale around to you for payment, chances are that’s a Square product.

More recently, they’ve also branched out into providing website building solutions for the same businesses as well as a peer-to-peer cash sending service, Cash App, similar to Venmo. This latter product has helped to shore up any pandemic related losses seen in their brick-and-mortar revenue streams. Data from the end of August showed monetized volumes sent via Cash App were up 150% year on year. A large part of this growth is believed to be due to it being able to receive stimulus checks and unemployment benefits.

Square’s Q2 earnings, reported in early August, showed EBITDA tightening 7% year on year but still in the black and well ahead of where analysts were expecting it to land. Top line revenue was 40% year on year and considering the consensus had been for a contraction, many on Wall Street were left licking their wounds. Revenue from the Cash App business played a big role in both of these upside surprises.

Fresh Bulls

Now as we head towards Q4, there are fresh faces starting to row in behind the company. Late last week, Oppenheimer were out with an upgrade to Square shares, with analyst Jed Kelly moving them from Perform to Outperform. In a note to clients, Kelly wrote “we see Square’s two-sided networks of sellers and consumers positioning the platform as a structural winner during the recovery to sustain elevated growth levels for multiple years”. It’s a bullish tone on a company that, by logic, should have seen their numbers drop as small businesses bore the brunt of the pandemic.

While near-term headwinds remain, Kelly believes the company’s "best-of-breed competencies in onboarding small merchants in a risk-efficient manner, while providing a cohesive user experience with multiple commerce channels, positions it for outsized share gains as economic activity normalizes." A fresh price target of $185 is certainly enticing for any investors that missed the run of the last six months, as it points to an additional upside of nearly 20% from where shares closed on Friday.

Oppenheimer’s sentiment mirrors that of Loop Capital Markets who, also last week, were out with a Buy rating of their own on Square and Paypal. In their own words, "we view this high-growth payment group more favorably than the acquirer space, leaning into a multi-faceted opportunity set across consumers and merchants”.

As the go-to merchant solution for any small business worth its salt, it’s certainly a sweet spot that Square finds themselves in as the economy continues to dust itself off. We might not see shares trading at a 60% discount again anytime soon, but we should be seeing them back trading at all-time highs before too long.