Square (SQ -2.00%) investors have endured quite a bit of volatility recently. Shares are down almost 30% in the last 12 months, significantly underperforming the broad market. However, despite the recent pullback, the stock has still gained nearly 600% since its Nov. 2015 IPO.
This payments processing company has developed solutions that enable sellers to receive payments via a swipe, NFC, Europay, MasterCard, or Visa. Square aims to provide its sellers with the tools to start, run, and grow their businesses, and it's building a sticky ecosystem of fin-tech products and services.
With an established track record of growth and improving profitability, many investors are likely eyeing the recent weakness as an opportunity to buy into a promising, high-growth company. So is Square a buy at current prices? Let's find out.
What drove Square's bearish run in the last year?
In the closing months of 2018, investor concerns over a slowing global economy, rising valuations, and the trade war between the U.S. and China sent a wide swathe of the market tumbling. Square fell victim to these macro trends, but the departure of CFO Sarah Friar also had shareholders worried.
Though Square shares made a comeback in the first half of 2019, tepid guidance for the third quarter dragged the stock lower again. Management estimated third-quarter adjusted revenue would fall between $590 million and $600 million, coming up short of analyst expectations of $599 million. The company also forecast adjusted earnings between $0.18 and $0.20 per share, below estimates of $0.22.
Square still has a huge addressable market
Looking beyond the upcoming quarterly report, investors should keep in mind that Square continues to grow revenue at an impressive rate, from just $687 million in 2016 to $1.59 billion in 2018, and that double-digit pace is set to continue.
So what will drive this rapid expansion? In the June quarter, Square’s gross payment volume (GPV) rose 25% year over year to $26.8 billion. While that's a slowdown from 30% GPV growth in full-year 2018, payments from large sellers accounted for 54% of GPV in the June quarter, up from 50% in the prior-year period. This shift provides Square with the opportunity to cross-sell other services and solutions to the larger businesses.
Square has estimated the total GPV opportunity at $3 trillion in the U.S. (considering 21 million small and medium-sized businesses), translating to a revenue opportunity of approximately $26 billion. The company also estimated its total addressable market at $59 billion, which includes the $26 billion for payments, $6 billion in e-commerce, $12 billion in software, and $15 billion for Square Capital.
That last business is worth highlighting -- Square Capital provides loans to businesses and is a key driver for revenue. In the June quarter, the company provided 78,000 loans amounting to $528 million, and Square Capital has lent over $5 billion to date.
Square has yet to enter markets abroad. There are over 125 million businesses around the world that can potentially use Square’s services, so the company's growth has the potential to accelerate once it targets international expansion.
Square has successfully built a full-service business that helps sellers manage the entire payment life cycle. It has created a loyal base of customers with an easily scalable model.
Naturally, there are investors concerned with Square’s rich valuation. With a market capitalization of $26.6 billion as of this writing -- the stock trades at nearly 7x revenue. However, the company is expected to grow earnings 45% annually over the next five years, and such high-growth companies command that kind of premium.
Investors should keep an eye on Square and make use of major dips in the stock like what we've seen in the past month as they build a position in the company.