Will the Square share price benefit from an expanding US economy?

A booming US economy can only be good news for the Square share price [SQ]. Government stimulus and low interest rates have stoked an economic expansion that looks set to continue. For Square, this means more people spending money online, more businesses using its products and more transactions.  

If this proves correct, then it would help continue a remarkable run of form for the Square share price. From when the coronavirus pandemic first hit the markets on the 16 March to the 20 July close, the Square share price has gained a colossal 547%. Year-to-date, Square’s share price is up 13.25%, while the stock popped 5.47% on 20 July following the announcement of a new banking product.

  

However, with the Square share price trading at an expensive 116.81 times forward price to earnings multiple, is it worth paying the premium for?

 

Why the Square share price could benefit from US recovery

The Square share price has benefitted the company’s ability to increase revenue delivered through its products, with analysts predicting this is likely to continue over the next couple of years as the US economy recovers.

In a MarketWatch report, Square comes out on top among Russell 1000 companies ranked by expected compound interest growth over the next few years, based on analysts polled by FactSet. The consensus is that the payment provider will see a 40% sales CAGR through 2023, with estimated revenue coming in at $26bn in 2023 — well above the 2020’s total net revenue of $9.5bn.

One fear is that the Federal Reserve will increase interest rates from their historic lows. That in turn could lead to increased prices, with Square’s merchants passing the costs on to the customer, impacting sales and the share price.

But are inflationary concerns overegged? MarketWatch notes that interest rate fears can cause a pullback in the market, yet since 2008 the impact has only ever been temporary. The publication also points out that keeping interest rates low is very much in the government's interests as any hike would only increase its own cost of borrowing.

“The fear of advancing interest rates can cause a quick reversal of a bull market for stocks, but this type of negative reaction has been temporary during the years following the credit crisis of 2008” - Phillip Van Doorn

 

“The fear of advancing interest rates can cause a quick reversal of a bull market for stocks, but this type of negative reaction has been temporary during the years following the credit crisis of 2008,” Phillip Van Doorn wrote in MarketWatch.

In June, S&P Global Ratings raised its real GDP growth forecasts for the US for 2021 to 6.7% in 2021, up from a previous 6.5%, and for 3.7% in 2022, up from 3.1%. The ratings agency predicted that the Fed would likely begin raising interest rates in the first quarter of 2023. A good setup for Square to continue its growth journey.

 

Square delivers robust earnings growth

The pandemic accelerated a shift to online that has benefitted tech companies like Square. For the full year 2020, gross profit grew 45% year-on-year to $2.73bn, while its Cash App, which lets users send money, save and invest, saw a 168% jump in gross profits to $1.23bn.

That red hot growth rate continued into the first quarter of 2021. Revenue came in at $5.06bn, up a huge 226% year-on-year. Adjusted earnings were $0.41 a share, easily topping Wall Street expectations of $0.16 a share. The Cash App delivered $495m in gross profit, up 171% year-on-year.

  

Square itself is bullish about its outlook for the second quarter, guiding for a 135% increase in gross profits from its merchant ecosystem and a 130% jump for its Cash App in April. Investors will be able to see how close Square gets to that mark when the company posts second-quarter results at the beginning of August.

 

Where next for the Square share price?

Square’s own data published in March shows that the share of cashless businesses has more than doubled after one year after the outbreak of COVID-19. This shift towards cashless payments puts it in a good position to benefit from continued economic expansion.

On 20 July, Square announced the launch of its small business banking service, Square Banking. The service will offer businesses savings and checking accounts. There are no monthly fees for an account, which is aimed at businesses that have struggled to get access to mainstream banking services. From Square’s perspective, this opens up another channel to get businesses on to its ecosystem, helping it hit the predicted sales targets outlined by MarketWatch.

The natural question is whether there is any upside left in the Square share price. Despite the strong performance, Square’s stock is still off the $283.19 hit in intraday trading on 15 February — a climb back to this point would see a 14.9% upside. Among the analysts, the Square share price carries a $276.7 price target, hitting this would see a 12.3% upside on 20 July close.