Shares of fintech giant Square Inc. (NYSE: SQ) have been on an absolute tear ever since the company went public back in November 2015. Square stock has returned a staggering 1,100% since its IPO, easily outpacing returns of the S&P 500.
The ongoing pandemic has acted as a tailwind for Square and other payment peers and the last few months have experienced a drastic shift in the way consumers and businesses pay for goods and services.
The digital payments market was a rapidly expanding one even prior to COVID-19 but business shutdowns and growth in e-commerce has accelerated this trend by leaps and bounds. According to this report from Motley Fool, the digital payments is forecast rise from $910 billion in 2020 to $1.5 trillion by 2024.
Square is one of the market leaders in the fintech space and is enviably poised to take advantage of secular tailwinds. The company is forecast by Wall Street analysts to grow revenue from $2.27 billion in 2019 to $7.5 billion in 2020, indicating a year-over-year growth rate of a monumental 230%.
Though this growth rate will decelerate significantly in 2021, it is still forecast at a healthy 28% in 2021.
Cash App key driver for Square’s growth
Square has successfully expanded its portfolio of products and solutions. While it is still one of the largest point-of-sales platforms, Square’s peer-to-peer application or the Cash App is fast gaining traction among users. In the second quarter, the Cash App’s monthly active users rose to 30 million while sales from this app rose 140% year-over-year to $325 million.
Overall, the company’s sales were up 64% at $1.9 billion while gross payment volume was up by 50% in Q2.
Huge potential for expansion
Square is now operating only in the developed markets of the U.S., Canada, Australia, U.K and Japan. This means it can continue to drive top-line growth at a stellar pace by aggressively expanding in high-growth markets of the Middle East, South East Asia and Latin America.
Further, the digital payments industry is still at a nascent stage in developing economies which will also provide Square with a first-mover advantage in most markets.
The fintech industry is bound to attract multiple players in the upcoming decade and will become a crowded space However Square can leverage its leadership position and continue to grow at a higher rate compared to the overall market.
The final verdict
Square has grown the gross payment volume on its platform from just $6 billion in 2012 to $106.2 billion in 2019. This growth has been supported by a colossal increase in its stock price.
Square stock is valued at a market cap of $67 billion. This means its trading at a forward price to sales multiple of 9.1x which does not seem too high given its robust revenue growth. Comparatively, its price to earnings multiple of 277x might dissuade even the most optimistic of growth investors.
However, we can see that the company is willing to sacrifice profitability for revenue growth, making it a strong bet for the upcoming decade.
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