BTIG fintech analyst Mark Palmer has been bearish on Square (SQ) since 2017, frequently citing potential downsides to the business despite its meteoric growth. (Square was Yahoo Finance’s 2018 Company of the Year; shares rose 55% that year.)
Now Palmer has changed his tune on the stock. Last week, he upgraded his rating to buy from neutral, with a price target of $220. (Shares are now up to around $214.)
The buy rating represents an evolution in Palmer’s thinking that began when he upgraded the stock to neutral from sell in mid-March. At that time, Square shares had plummeted at the start of the pandemic and Palmer was merely adjusting his rating because he felt the stock looked more properly valued after its big drop. BTIG predicted Square would continue to get burned by the pandemic along with the small businesses it serves.
Then Square’s merchant customer base bounced back more quickly than expected.
Now Palmer tells Yahoo Finance his bullishness is based on Square’s Cash App, and two groups of customers it’s serving: people with no bank accounts; and new cryptocurrency investors.
Cash App is “a game changer” for “unbanked and underbanked consumers” and “basically serves as a proxy bank account when they don’t have another option,” Palmer said on Wednesday on Yahoo Finance Live. “That really came to the fore when the stimulus payments were being distributed.”
Square enabled consumers to deposit their stimulus check directly into Cash App. That service helped bring a lot of new users to Cash App—and so has its embrace of bitcoin. Square first added buying and trading of bitcoin to Cash App in 2018, and Q3 2020 was its first quarter with over $1 billion in bitcoin revenue. (This year it doubled down on bitcoin even further by buying $50 million worth of it for the company’s balance sheet.)
“What you’re seeing now is... you really have a barbell effect between the unbanked and underbanked on one side, and traders of cryptocurrency on the other,” Palmer says, “and it’s a very potent combination.”
Thanks to serving those dual groups, Palmer says, “We think the Cash App puts Square in the position to become a super app and go well beyond simple facilitation of peer-to-peer payments to something much bigger, along the lines of Alipay in China.”
That is a hugely bullish comparison. Alipay is the largest mobile payments app in the world, and its parent company Ant Group was set for a $34.5 billion dual IPO in Shanghai and Hong Kong this month, before Chinese regulators put a stop to it.
Palmer cites Square’s $50 million acquisition this week of Credit Karma’s tax unit as the latest sign of those big-picture ambitions.
Daniel Roberts is an editor-at-large at Yahoo Finance and closely covers fintech and bitcoin. Follow him on Twitter at @readDanwrite.