Numerous “stay-at-home” stocks took a dive after Pfizer (NYSE:PFE) announced it had developed a vaccine with 90% effectiveness in combating Covid-19, the disease caused by the novel coronavirus. As a popular coronavirus stock, Square (NYSE:SQ) was among those companies that took a hit Nov. 9. Square stock dropped over 7% after the news was announced.
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SQ stock has climbed about 190% year to date, as the pandemic catapulted the value of its e-commerce solutions. However, while the stock initially tumbled on the vaccine news, it has now regained some of those losses.
This rollercoaster ride has led to some confusion among investors. Is it a buy or is it a sell? Let’s take a closer look.
The Selloff in Square Stock Was Overblown
The knee-jerk reaction by investors to drop coronavirus stocks like Netflix (NASDAQ:NFLX) and Square was largely overblown. The idea behind the bearish vaccine drop? With the new viral threat minimized, the value of the products they provide will diminish.
People will go out to bars again. They’ll enjoy music at live concerts. Things might be “normal” within the next year or so. People will spend less time at home. (Or so they think.)
But when it comes to Square stock, the bearish reaction failed to recognize the trajectory of the financial landscape prior to Covid-19. It also ignores the “new financial normal” that the virus has created as a consequence. Each of these elements play into Square’s long-term future as a powerhouse in fintech.
Many likely know Square for its iconic mobile credit card readers, but it’s much more than that now. Specifically, the company has “moved into a host of other small-business solutions for online storefronts and e-commerce-only businesses, such as small terminals, contactless payments, online payments, and digital systems to run operations such as curbside pickup.”
It’s this movement (along with its prior success with the card readers) that has led to its breakout success over the past few years. Its Seller and Cash App products have each demonstrated impressive growth in 2020. But, more importantly, Square is part of a “digital transformation” that’s here to stay.
Shamsul Chowdhury, in a piece for TotalRetail, offers a telling breakdown of post-coronavirus e-commerce: “[T]his global pandemic has altered the retail ecosystem’s ratio of offline-to-online sales and will continue to do so even after brick-and-mortar stores reopen. Brands that are able to build digital experiences and an online community will surely win consumers’ share of spend in the retail space today and tomorrow.”
Likewise, Square describes its outlook for a post-coronavirus future in the following manner:
“McKinsey research shows mobile payments are 80% more important to consumers than they were before the pandemic. As businesses embrace omnichannel and contactless approaches, they can use email and other communication tools to keep customers informed of what changes are being made for safety, and what new products and services are available.”
For many, Square’s products offer the solutions that this increasingly digital future demands. Many have already adopted its products, as demonstrated by its more recent success with Seller and CashApp and overall user growth in years prior.
The Bottom Line on Square
Although there are plenty of positives to consider, there are also a few reasons for caution. Specifically, some analysts fear that Square stock is overvalued.
These concerns existed before the impact of the pandemic — before its 190%+ climb this year. Furthermore, Square does have some stiff competition with key competitors like PayPal (NASDAQ:PYPL) in its sights. These risks play an important role in any solid investment thesis.
However, despite these risks, analysts still maintain that the company’s long-term prospects make Square stock buy-worthy. Mark Palmer of BTIG upgraded Square recently regardless of these concerns. He cited “Square’s opportunity to capture more of a vast addressable market” as reason for continued optimism. After all, “the Seller business is still less than 3% of a $100 billion market, while the Cash App has less than 2% of a $60 billion-plus market.”
Ultimately, if you think that a financial revolution is upon us thanks to fintech and that the coronavirus solidified its arrival, then there’s no reason to keep Square stock off your radar. Although it does have stiff competition, the growth narrative is too strong to ignore. Consider it a buy on any of these illogical dips.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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