Is Square a buy even if the stock market collapses?

Square (NYSE: SQ) has been one of the best performing stocks on the market in recent years. The mobile payment company’s stock price has returned over 1,100% over the past five years, and this year it has risen over 150%. Square has been a growth machine, pandemic or no pandemic.

With such strong growth, it has attracted a lot of investors – and a lot of expectations. At Friday’s close, its price-to-earnings ratio was ridiculously high at 245 and its price-to-book value an astronomically 34. Is Square ready for a correction if the tech bubble bursts? And if so, is it still a purchase today?

Fair and honest

The tech sector has driven the stock market’s resurgence since its March lows. Stock prices have skyrocketed for many tech companies, especially those, like Square, which have provided essential service as companies shut down or downsize during the pandemic. Square’s technology allows sellers to process payments, payroll, and other functions, and it allows consumers to send and receive money through a mobile app. His services have been in high demand at a time when people stay and work from home and are socially distancing themselves. This has led to tremendous growth.

Image source: Getty Images.

In the second quarter, revenue jumped 64% from the same period a year earlier to $ 1.9 billion, while gross profit rose 28% to $ 597 million. The Cash app generated a big chunk of it, with $ 1.2 billion in revenue and $ 281 million in gross margin in the quarter. It had 30 million active users in June, while the Cash Card, a debit card linked to the Cash app, had around 7 million users. Those gains offset a 17% drop in revenue on the seller’s side of the business as transactions slowed due to the closings.

The surge in the tech sector suffered a backlash in September, as the sector is down about 10% this month. Valuations of high-tech stocks are at odds with declining consumer spending, high unemployment and booming economic growth. Many fear that the microburst we saw in September was just the opening act of a bursting of the tech bubble, as we haven’t seen since the dot-com bust of 2000.

So where does that leave Square?

Square has legs and room to run

Square was pulled down around 5% this month in tech sales, but its multiples remain very high. If the bubble burst, would Square still be a good investment? For long-term investors, the answer is yes. The long-term trends that are driving Square and the market leadership it enjoys are just too good. Even if there is a crash, bubble, or whatever term you want to use for a correction, it will be short term. In the long run, Square will be a winner, for a few good reasons.

First, Square is at the forefront of a long-term trend to move away from cash payments to digital payments. According to a recent study, many developed economies in Europe and Asia will be almost entirely cashless by 2030, with the United States not far behind. Recently released square his own report that the pandemic has accelerated this trend. And, according to analysts at MoffettNathanson, Square only has 2% of the $ 60 billion addressable market with its Cash app, and within five to seven years, it will produce $ 5 billion in annual revenue and $ 2 billion. annual profits.

Second, Square is different of most of its competitors because it serves both the buyers and sellers ecosystems. While the two ecosystems are strong and growing, the key, according to CEO Jack Dorsey, is to connect them. “We think there is a lot of real strength that comes from connecting the two ecosystems,” Dorsey said during the first quarter results call.

Square recently introduced two services for its customers that will allow the company to do just that. Its new pay-on-demand service allows employees of payroll clients to take a cash advance of up to $ 200 on their wages earned through the Cash app at any time. And its Instant Payments service allows payroll customers to instantly fund their payrolls with money in their Square account balance.

Square has also received approval from the Federal Deposit Insurance Corp. for a banking charter from an industrial loan company (ILC). The bank is slated to launch in 2021, which would allow Square to provide loans and open the door to deposits and direct deposits using the Cash app, thus linking the two ecosystems.

So even though Square is going through a rough patch in the coming weeks, this fintech remains an excellent long-term stock that will generate excellent returns for years to come.

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Dave kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares and recommends Square. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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