This SQ Stock Forecast article was written by Joshua Geller – Financial Analyst intern I Know First.

Highlights

• The IKF Algorithm predicts that Square Inc.’s stock is bullish for the next year with a signal of 514.09. The company is predicted to rise due to the release of its new products and launch of a microloan business that is taking on financial institutions, a positive quarterly report and a clear price action resistance breakthrough
• Square’s stock price has increased by 72.7% within the past year, compared to 34.37% for the S&P 500 and 24.9% for the US IT Software-Infrastructure industry.
• On August 1st, Square announced its acquisition of Afterpay Limited (ASX: APT) for $29 billion USD.
• The company released its new products: Square checking, savings and loans which are targeted towards small businesses and consumers as new ways to rely upon mobile financial technology.
• Square has recently realized positive earnings within 2020 and is predicted to increase its earnings by 36% over the next year.

Company Overview

Square Inc. produces and maintains a commerce ecosystem that enables its sellers and consumers to easily access credit and perform online transactions. They generate revenue in two ways, with their Cash App and Seller services. Cash App is a suite of financial products to help consumers manage their money where they can make peer transactions, credit card payments and gain access to bitcoin as well as other functions to help them save or invest their money. On the other hand, seller services allow businesses to track sales, collect digital receipts, manage inventory, examine historical product data and create websites and social media pages to facilitate orders. Also, Square produces hardware to allow for easier purchases like a credit card scanner that hooks up to a phone, iPad stands to act as a cash register or “Square Terminal” that allows users to carry around a payment machine. This way the company monetizes through payment transaction fees and premium app subscriptions that allow access to higher amounts of data and business analysis.

Recently, Square has created checking and savings accounts for small businesses structured under “Square Financial Services”. This is following a current trend within the company to start competing with traditional banks and financial institutions. Perks are that funds in a Square Checking account that are deposited will be instantly available to use for payroll and other payments using a Square debit card, and says its accounts have no account minimums, overdraft fees, or recurring fees. This is one step within the company’s business model to create a closed loop in its seller’s financial lifecycle. To demonstrate, Christina Reichers (head of Square Business Banking) states, “an electrician out in the field can pull up his phone at the point of sale, submit an invoice, get paid on the spot, and then take the money into the checking account linked to the debit card and use the card at the hardware store to buy supplies for a job scheduled later in the week. It’s a mobile-first approach”. 

Square disrupts the Banking Industry

Additionally, Square Inc. announced the launch of a new service: Square Loans which includes a new suite of banking applications targeted towards small businesses and especially those who have struggled to access traditional banks credit services. These loans, which are originated by Square Financial Services, are smaller than $250k a piece and have zero interest but rather a fixed fee. Now when a business borrows money from Square, it has the advantage of being able to track the health of its seller and understand its financial position to pay back the loan due to Square processing sales, recipes and other key business metrics. However, these loans are not contractually guaranteed or insured in any way and the only requirement for the seller is to pay a minimum payment on the loan every 60 days which can create a risk of loss within Square if they give away too much credit at one time. Regardless, the company has seen a major success of this program over the past year and has attributed its 93% increase in subscription and services-based revenue for the last six months primarily due to Square Loans. In the future, the company will allow for loans to small businesses that rely not on a credit score, but upon previous transaction history with Square and thus will be able to approve them instantly on their checking account. 

Demonstration of loan repayments through a fixed percentage of daily credit card sales:

Since Square targets small/medium businesses in their seller services and consumers through the Cash app, it is competing with traditional banks in bringing liquidity to those who are looking for smaller loans. One area where Square picked up slack from larger financial institutions was with Paycheck Protection Program loans. As of December 31, 2020, Square Capital had facilitated approximately $857 million of PPP loans, however, its average loan was less than $11,000 (a 1/10th of the average PPP loan) allowing it to target the U.S. Small Business’s Association smallest tier of lending. Jackie Reses, Square Capital Lead explains “While our lending business has served Main Street small businesses for years, we knew that as our sellers and their communities were facing deep economic uncertainty, we could play a meaningful role in disbursing stimulus funds and aimed to become one of the country’s top facilitators of microloans”. 

This revolution in financial banking and services is beneficial for Square due to the rise in consumer’s saving habits over the course of the pandemic. On the graph below, it is seen that consumer Personal Savings Rate, or a proportion of personal income that a person doesn’t spend or pay in taxes. In the past 20 years, the rate has never been so high. This is reflected in consumers spending less by not going out, putting more money into their bank accounts and when they do buy they are more likely to not use cash. For Square this has led to the cost of revenue for credit card transactions for the year ended December 31, 2020 to decrease by $50.2 million compared to the year before. Seller costs benefited from a higher percentage of debit card transactions and an increase in average value per transaction which are cheaper. (Source: SQ 10-K 2020) This has led to a 60% decrease in transaction costs for the company extending into 2021 and is one of the reasons why they started reporting positive earnings. 

On August 1st, 2021 Square announced its acquisition of Afterpay Limited (ASX: APT) for $29 billion USD. Was one of the first to establish a “buy now, pay later” purchasing system where consumers can access items they want without having to pay entirely upfront, usually through a payment plan with 4 installments over 6 weeks. Both corporations cited that they have a shared purpose in making the financial system more accessible and inclusive backed by technology solutions. Afterpay will become integrated into Square’s Cash App and will hopefully bring more users and increased value to the parent company. 

Competitors and Industry Analysis

Over the past year, Square’s share price has out-performed its direct competitors of Paypal, Mastercard, Visa, Global Payments and Fiserv. However, it has high volatility and a high average volume of shares traded, meaning that the stock is popular right now. This is most likely due to the recent headlines the company is making and the general business model that is fit to transition consumers and sellers towards relying upon financial technology over the course of the pandemic. 

However, the stock is possibly overvalued right now. Its current price-to-earnings ratio is 5x its direct competitors with increasing earnings over the past 4 quarters. The share price currently reflects the value the company will get in the future due to investor speculation, it has already increased 115% from its 52 week low and has a high PEG ratio. 

This graph is shown to give context to Square’s recent earnings reports. It is increasing earnings per share over the past 4 quarters beating analysis estimates:

Technical Analysis

Over the past year, Square has seen highs on both August 9th and April 14th, which has turned into a resistance level that will possibly become retested, after this stock has seen through its bearish trend reversal shortly following its Q2 earnings report. The previous bullish trend started on May 18th and was in an uptrend with higher highs and lower lows and three main market pullbacks until August 9th where it hit a support level of ~$280. This came recently after a large increase in the share price on August 2nd (+11.45%) following its Q2 2021 earnings report and announcement of Afterpay acquisition. 

This chart is on a 4-hour time frame (compared to daily above) and has identified more recent areas of support and resistance. The bottom support at ~$200 has been tested at least three times within the past 6-months and the ~$276 top resistance has been an area of recent prince congestion and the top of the current trading range. The middle purple box is an area of recent price resistance, turned trading range turned support and is confirmed by the VWAP (orange line anchored to Jan 1st) as an area of high price activity, thus it should be noticed and watched. Over the past three days, the stock has decreased by 2.8% as a market pullback for the high price activity following its earnings report. 

Conclusion

Square Inc. is trying to revolutionize the financial sector and bring the benefits of big tech towards investing, credit, crypto, sales, sending payments to others and even bank accounts. Following the release of its new products and use of quick microloans targeted towards small businesses and consumers, it is predicted to increase its earnings in the forthcoming years. This means that like other technology companies, Square is a growth stock and the reason it may be overpriced right now is because investors are betting on in the future it will grow faster than the market. Thus Square’s price is predicted rise due to new products, a price action resistance breakthrough and businesses transitioning into financial technology.

The I Know First Algorithm has a bullish forecast of SQ’s share price for the next year. From I Know First’s forecast below, SQ stock has positive signals for all long-term time horizons from 1 month to 1 year, which can be an indicator for its potential growth. It has a strong signal of 514.09 with high predictability of 0.51, suggesting a strong-buy position for SQ.

Past I Know First Success with EXPI Stock Forecast

I Know First has been bullish on past SQ Stock Forecasts. Previously, on August 16th, 2020 the I Know First algorithm issued an optimistic forecast for SQ stock price as a top Robinhood stock. Eventually, the company saw a rise in its share price by 85.55% for a 1-year time horizon.

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Please note-for trading decisions use the most recent forecast.