Fintechzoom SQ Stock Analysis: Is Square Poised for Further Growth?

SQ stock has had an impressive run in 2022, with shares up over 15% year-to-date. As the leading provider of financial services and digital payment solutions to small businesses and merchants, Square continues to benefit from the reopening of in-person commerce as COVID restrictions ease.

However, investors are now wondering whether Square stock can maintain this momentum or if it’s topped out after more than doubling from its pandemic lows in 2020. We take a closer look with the help of Fintechzoom sq stock analysis and competitive position to assess its future growth potential.

A Comprehensive Ecosystem of Payments

Square’s ecosystem of integrated payments, software, and financial services creates strong network effects and customer stickiness once businesses are on the platform. While competition is growing, Square differentiates itself through its seamless omnichannel offerings spanning online, in-app, contactless, and traditional card payments.

Moving Beyond Payments

Looking beyond payments, Square is making strong progress in growing other parts of its business like loans, bitcoin, and revenue from larger sellers. 

Subscription and services-based revenue streams including Square Appointments, labor management, and accounting tools provide durable earnings.

Impressive Financial Results

Financial results underscore Square’s momentum, with $9.5B in total net revenue in 2021, up 87% year-over-year. Gross payment volume processed through the Square ecosystem reached $172 billion, up 49% despite tougher comps.

Positioned for Continued Growth

We remain bullish on Square’s position in a huge total addressable market for financial services. 

With a rock-solid balance sheet and consistently strong execution, Square is well-placed to keep growing profits through continued innovation.

How Does Square’s Valuation Compare to Other Leading Fintech Companies?

Here is a table comparing Square’s valuation multiples to its peers:

As the table shows:

• Square trades at a modest premium to payment processors FISV, FIS and PayPal given its faster revenue growth in the 20-25% range.
• It sits below high-flyers Adyen and Silvergate which are capturing outsized gains but also face more uncertainty around profitability.
• Square’s valuation is supported by consistent execution, diversifying revenue streams, and clear path to ongoing margin expansion through scale.

At 8.5x estimated 2022 sales, Square’s valuation seems more than justified relative to peers considering its optimized risk-reward profile targeting underserved small businesses and independent vendors with sophisticated omnichannel payment solutions.

Financial Metrics and Valuation

Let’s look deeper at some of Square’s key financial metrics that illustrate its strong growth profile.

In 2021, total net revenue grew 87% to $9.5 billion driven by gains across all business segments. Gross profit also increased 78% to $4.4 billion. More importantly, Square has demonstrated improving operating leverage as its adjusted operating margin expanded to 6.2% compared to just 1.2% in 2020.

Square is continuing to reap economies of scale from its platform. Transaction-based gross profit per seller grew 28% in 2021 reflecting the value merchants derive from Square solutions. Management expects transaction-based revenue to grow 20-25% annually over the long run.

From a valuation standpoint, Square is not cheap trading at around 8.5x expected 2022 sales. However, given its leadership position in a largely untapped market, we believe the growth justifies the premium multiple.

Square’s adjusted EBITDA margins have doubled in just two years and we forecast continued steady margin expansion as fixed costs are spread over a larger revenue base.

Management is guiding for adjusted EBITDA margins to reach approximately 12.5-13% by 2023 and we see potential for 15%+ margins within the next five years. 

When factoring in Square’s strong revenue momentum, improving profitability, large total addressable market, and differentiated product suite, we believe the stock can continue to trade at a sales multiple above industry averages. Based on our financial model, Square has at minimum 50-60% upside from current levels over the next two years.

Conlusion

Our Fintechzoom SQ stock analysis indicates that Square remains well-positioned for continued strong growth. Its leadership position in small business payments and expanding ecosystem of financial services create durable competitive advantages. 

While macroeconomic factors may impact merchant performance in the near term, Square is executing well on its strategies across payments, cash apps, bitcoin, and banking.

With a large addressable market yet to be fully penetrated, we believe Square can sustain top-line gains of 20-25% annually over the long run. 

Based on our Fintechzoom analysis, Square stock remains a top pick in the fintech space with significant upside potential over the next 2 years as it capitalizes on opportunities across commerce, finance, and the digital economy. 

We maintain our Buy rating on SQ!