Wait for a pullback on Square stock, this fund manager says

Payment processing company Square (Square Stock Quote, Chart, News NASDAQ:SQ) has had quite a run this year as its share price has now more than doubled. But all those gains make it a less attractive option at the moment, according to portfolio manager Kim Bolton, who advises that investors wait for a substantial dip.

“Square was actually trading at a discount to the likes of like a PayPal or even to a Visa but then when they reported [earnings] and everyone understood that they were really excelling during the pandemic period, it just sort of took off,” said Bolton, president of Black Swan Dexteritas, who spoke on BNN Bloomberg on Monday.

“So, I would recommend keeping an eye on it. It’s a bit rich right here but if you can buy it back down at $130 — it’s a long way away but if you can it would be a good buy,” Bolton said.

Square had been pretty flat for a couple of years leading into 2020 but after the general pullback of February and March, the stock has gone nowhere but up, climbing from roughly $40 to as high as $162 by early September.

The stock has been buoyed by strong earnings through the COVID-19 period, with its second quarter revenue jumping 64 per cent from a year earlier to $1.92 billion. Adjusted earnings for the Q2 were $0.18 per share, which was way ahead of the loss of $0.05 per share expected by analysts. (All figures in US dollars.)

With its focus on small business in the service and retail sectors, Square was expected to take a bit hit during COVID-19 due to lockdowns, patron restrictions at restaurants and the like, but the company has come out of the worst of the economic slowdown in good shape. For the second quarter, Square’s peer-to-peer mobile payment platform Cash App actually had its gross profit rise by 167 per cent year-over-year to $281 million, with management saying that deposits in the United States from stimulus cheques,
unemployment cheques and tax refunds were drivers.

“Square is one of those merchants service aggregators and provides management tools, as well as financing, and it earns about 60 per cent of its gross profit from transaction fees, and it has a phenomenal profit margin of 37 per cent,” said Bolton. “The rest of the 40 per cent of their profits come from subscription and other services.”

“We actually took profit in this up at $155 back at the beginning of August,” Bolton said.

“But it’s one of the firms that you have to keep an eye on when you have these pullbacks.”

Square management said in its second quarter shareholder letter that new customer acquisitions and product velocity are still focal points for growing the company during the current pandemic climate, calling the COVID-19 economic environment a “compelling opportunity to invest in acquiring new customers.”

“We believe our Cash App and Seller ecosystems are well-positioned to help our customers adapt to the impact of COVID-19, based on trends we observed during the second quarter. We intend to prioritize investments in our Cash App and Seller ecosystems that we believe will help drive attractive long-term returns,” Square said.