Square’s (NYSE:SQ) revenue, excluding certain items, grew 46% year-over-year in the second quarter to $563 million. Yet investors have pushed SQ stock down 22% over the past three months on concerns its growth is slowing.
Recently, Barron’s contributor Ben Walsh mentioned that Square’s gross payment volumes (GPV) were lower than analysts’ average estimate in Q2 2019. That was the second consecutive quarter that its volume failed to meet the average estimate. Walsh pointed out those facts during a discussion about Square’s competitors catching up with it.
But before selling Square stock, investors might want to think twice. Although Square’s competition is heating up, good companies always figure out how to grow despite others trying to knock them off stride.
Square’s more than up to the challenge. Here’s why.
Forget China and Focus on the Big Picture
SQ stock lost 4% on Friday, October 18, its worst single-day performance since it reported its Q2 earnings at the beginning of August. The one-day decline was, in large part, a negative reaction to the tentative “Phase One” trade deal that President Donald Trump announced October 11.
InvestorPlace columnist Brad Moon discussed the decline the following Monday, suggesting that if the trade deal falls apart, the tariffs that were postponed on Oct. 15 would kick in on Dec. 15, That would weaken consumers’ desire to spend, possibly triggering a recession, Moon wrote.
“If consumers slow their spending, transactions using Square technology will also slow, and that will hit Square revenue. The drop in SQ stock on Friday reflects the concern that we could be heading in that direction,” Moon wrote in a column published on Oct. 21.
There is no doubt that consumers will spend less during a recession.
However, that doesn’t necessarily mean SQ will suffer the same fate as the average company that depends on consumer spending for their livelihood.
That’s because SQ processes payments for many small businesses, and its customer base is rapidly growing. Regardless of the state of the economy, SQ will likely add many new customers through word of mouth and its marketing efforts.
Moreover, SQ will continue to innovate its way to revenue growth by delivering new initiatives to engage its customers.
Zero-Fee Stock Trading and SQ Stock
Square announced in a series of tweets on Oct, 24 that it was providing users of its Cash App mobile payment service platform with the ability to buy or sell fractional shares of stock without paying any commission or fees.
Now investors who use Cash App, can buy 1/62 of a share of Square stock for a buck, paying no fees to do so. Even better, the same rules apply to ETFs.
For example, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is currently trading around $303 per share. Young investors can set aside $100 per month to buy a fraction of a share of SPY. If its share price goes sideways for the next year, they could buy four shares with this small, monthly contribution.
After having written about investing for more than a decade, I can say that this kind of innovation will help young people save for retirement.
Sure, plenty of firms have launched zero-fee, fractional trading, but SQ is providing the service at a loss in order to attract more users to its Cash App.
In July, 2.4 million people downloaded Cash App, the largest monthly download number in its history. At the end of July, Cash App had been downloaded 59.8 million times, 7.1 million more times than Venmo, PayPal’s (NASDAQ:PYPL) peer-to-peer payment app.
The Bottom Line on SQ Stock
Sure, payment processors such as Clover are looking to take market share from Square, but as long as SQ keeps rapidly adding new customers, I see the recent decline of its share price as a buying opportunity, not a reason to cut and run.
As for Jack Dorsey’s two stocks, I continue to like Square over Twitter (NYSE:TWTR) over the long haul.