Long-Term Trends Will Drive Square Stock Above $100 Soon

Back in February, I recommended Square (NYSE:SQ) stock as a play on a cashless future. In the short term, that call admittedly did not play out well.

The Pandemic Makes SQ Stock Even More Relevant

The Pandemic Makes SQ Stock Even More Relevant

Source: IgorGolovniov / Shutterstock.com

In fact, SQ stock would lose about half its value in a matter of weeks. It was one of the biggest large-cap victims of the pandemic-driven panic that hit the market in late February and early March.

But markets found their bottom, and so did SQ. The stock now has doubled from its lows. Near $80, it actually trades modestly above where it did when I recommended it on Feb. 7.

From here, however, the bull case I laid out 3.5 months ago still holds. And while the company is going to face short-term headwinds, its promising future may arrive quicker than even bulls like myself thought at the beginning of the year.

It’s that long-term opportunity on which investors are starting to focus. That’s why Square stock has rallied. And it’s also why the stock has more room to run.

Yes, There Will Be a Short-Term Hit

There’s little doubt Square is going to face a short-term impact from the novel coronavirus and the resulting economic shutdown.

In its first-quarter report earlier this month, Square withdrew its guidance for the full year. It declined to provide an outlook even for the second quarter.

What figures Square did disclose look worrisome. Earnings for the first quarter badly missed Wall Street estimates. The company said in its first-quarter shareholder letter that gross payment volume (GPV) declined 35% year-over-year in the last two weeks of the quarter.

The news got even worse in April. According to the Q1 conference call, GPV dropped 39% YOY in April. Small businesses drive nearly three-quarters of Square’s GPV, and many of those businesses were closed or saw plunging sales.

Looking to the near term, SQ stock simply looks dangerous. Indeed, that’s how traders initially reacted, as the stock fell sharply in early after-hours trading.

The Long-Term Benefit

But SQ would reverse those losses — and close the following day up nearly 10%. Investors did what they were supposed to do: They looked closely and took the long view.

From that perspective, the quarter actually looks bullish. The company’s Cash App saw enormous growth, with gross profit rising 115% year-over-year. Cash App seems to be outpacing rival Venmo, from PayPal (NASDAQ:PYPL), while even giants like Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) lag far behind.

But it’s not just the results for Cash App in the quarter that matter. CEO Jack Dorsey said on the call that the number of Cash App direct deposit accounts rose from 3 million in February to 14 million in April.

That’s stunning growth. And that growth will have a beneficial impact over the long term. In less than three months, Square picked up millions of new users. It saw many existing users expand the usefulness of their accounts.

Those customers are exceedingly valuable. Excluding cryptocurrency transactions, Cash App gross margins are close to 80%. That alone accelerates the long-term case for SQ stock.

SQ Stock and the Cashless Future

It’s also worth taking a step back. Again, SQ is a play on a cashless future. That future probably arrives quicker than we thought.

After all, cash transactions are going to be less popular going forward. More sales will be transacted online and through apps. That’s a huge boon to Square’s long-term potential.

There’s even some help coming from costs. Square is following Dorsey’s other company, Twitter (NYSE:TWTR), in enacting a permanent work-from-home policy. Given labor and office costs in the San Francisco Bay Area, that policy can provide a significant boost to margins in the future.

Take the Long View With Square

Again, Square is going to have take a short-term hit. Q2 results are going to be ugly. We may see some lingering effects into Q3 and Q4 as well.

But good investors don’t look a quarter out. Good companies don’t, either.

They take the long view. And the long view shows not only that digital payments are going to be the future, but that the future is going to arrive more quickly than we thought.

There will be more than one winner. Indeed, PYPL stock now is up 40% so far this year. I’ve recommended Visa (NYSE:V) for similar reasons.

But Square is going to be one of those winners. That’s what I believed in February, and it’s certainly what I believe now. As normalcy returns, that will become clear to even more investors. And SQ stock will do a lot more than just recover its losses — it will set new highs.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve nowMatt does not directly own the aforementioned securities.