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3 Reasons to Buy Square, and 1 Reason to Sell

By Leo Sun – Aug 9, 2021 at 12:09PM

Key Points

  • Square is growing faster than most of its fintech rivals.
  • A lot of that growth is attributed to Bitcoin and its Cash App.
  • Its growth is impressive, but its stock is expensive and its long-term growth is unpredictable.

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The fintech star is still firing on all cylinders -- but its growth strategies might be too volatile for some investors.

Square's (SQ -0.55%) stock price hit a new all-time high after the fintech company posted its second-quarter earnings report on Aug. 2. Should investors chase this high-flying stock, which has nearly doubled over the past 12 months, or should they wait for it to cool off?

Let's examine three compelling reasons to buy Square -- and one reason to sell it -- to decide.

1. Square's explosive growth rates

Last year Square's revenue rose 101% to $9.5 billion, even as the pandemic shut down many of the businesses that used its payment processing and seller services. It accomplished that growth by facilitating more Bitcoin (BTC -2.57%) trades on its Cash App throughout the crisis.

Square's Register.

Image source: Square.

Square's dependence on lower-margin Bitcoin revenue to offset the slower growth of its seller services squeezed its gross margins last year, but its gross profit still rose 45% to $2.7 billion.

In the first half of 2021, Square's Cash App users continued to trade Bitcoin, even as the cryptocurrency's price tumbled. Meanwhile, its seller-oriented businesses recovered as COVID-19 restrictions were relaxed. As a result, Square's total revenue surged by triple-digit percentages in the first and second quarters as its growth in seller revenue (which excludes Bitcoin) accelerated.

Growth (YOY)

FY 2020

Q1 2021

Q2 2021

Revenue

101%

266%

143%

Revenue (Excluding Bitcoin)

17%

44%

87%

Gross Profit

45%

79%

91%

Source: Square. YOY = Year over year.

2. The Cash App is growing like a weed

Square's Cash App was initially a peer-to-peer payments app, but the company subsequently added Bitcoin and stock trades, as well as a linked debit card. It will further expand that ecosystem with tax filing services from Credit Karma and "buy now, pay later" (BNPL) services from the Australian company Afterpay (AFTP.F), which it recently agreed to acquire. This chart reveals just how rapidly the Cash App is growing, and why it's become Square's most important growth engine.

Cash App

FY 2020

Q1 2021

Q2 2021

Monthly Transacting Users

36 million

--

40 million

Revenue Growth (YOY)

440%

666%

177%

Percentage of Square's Revenue

63%

80%

71%

Gross Profit Growth (YOY)

168%

171%

94%

Percentage of Square's Gross Profit

45%

51%

48%

Source: Square. YOY = Year over year.

The Cash App's Bitcoin trading platform enables it to ride the same crypto tailwinds as Coinbase (COIN -1.26%) and other crypto exchanges, and its free stock trades could pull traders away from Robinhood (HOOD -0.32%). In the second quarter, the Cash App's transaction volumes nearly quadrupled from two years ago -- "driven by growth in existing customers and newer customers" -- so this core growth engine won't stall out anytime soon.

3. Its takeover of Afterpay

Square's planned purchase of Afterpay in a $29 billion all-stock deal will make it the market leader in the global BNPL market -- which Bank of America estimates could grow 10-15 times by 2025 -- and significantly expand its business beyond the United States.

Afterpay's number of active customers increased 63% to 16.1 million in 2021, as its underlying sales (the value of all its transactions) increased 90% to $15.6 billion. By comparison, PayPal (PYPL 1.89%)has only processed $3.5 billion in BNPL payments since it launched a similar service a year ago.

Square will integrate Afterpay's BNPL services into its Cash App and Seller ecosystems. That integration will give its users and merchants even more payment options, and further widen Square's moat against PayPal, which competes against the Cash App in the peer-to-peer payments space with Venmo.

The one reason to sell Square: Its unpredictable growth

Analysts expect Square's revenue to surge 111% this year, but grow just 14% next year as its Bitcoin business cools off. They expect its adjusted earnings to grow 80% this year and 40% next year.

Those growth rates look robust, but they're unreliable because they're pinned to shaky estimates for Bitcoin's prices. Square still generated 64% of its revenue from Bitcoin in the first half of 2021.

Based on analysts' expectations, Square's stock looks pricey at about 130 times forward earnings. If Bitcoin's price gets cut in half, analysts will need to lower their expectations for Square -- which would make its stock even more expensive. But if Bitcoin's unit price soars to $100,000, as some bullish investors predict, Square could easily defy Wall Street's expectations for a slowdown next year.

Square's strengths outweigh its weaknesses

Over the past few years, Square has evolved from a basic digital payments company into a diversified fintech giant. It even recently launched business bank accounts in a new platform called Square Banking, which further blurs the lines between its digital services and traditional banks.

Square's stock isn't cheap, but its strengths easily outweigh its weaknesses. It's bold, ambitious, and a more exciting stock to own than PayPal, which is much more conservative than Square. Therefore, investors who can stomach the near-term volatility should still consider buying this high-growth stock.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun owns shares of Square. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Bitcoin, PayPal Holdings, and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
SQ
$63.03 (-0.55%) $0.35
PayPal Holdings Stock Quote
PayPal Holdings
PYPL
$81.59 (1.89%) $1.51
Afterpay Limited Stock Quote
Afterpay Limited
AFTP.F
Bitcoin Stock Quote
Bitcoin
BTC
$16,140.12 (-2.57%) $-425.76
Coinbase Global, Inc. Stock Quote
Coinbase Global, Inc.
COIN
$43.72 (-1.26%) $0.56
Robinhood Markets, Inc. Stock Quote
Robinhood Markets, Inc.
HOOD
$9.36 (-0.32%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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