Farewell 2Q20 - the best quarter for stocks since 1998. While everyone has been trying to make sense of the almost absurd market gains, the facts cannot be denied.
One of which is that between the market meltdown in March and the beginning of Q3, many stocks notched all-time highs. Fintech company Square (SQ) stands among these highflyers. Shares doubled during 2Q, and at the end of Tuesday June 30’s session, the financial disruptor was looking down on Wall Street from the vantage point of a record $104.94 per share. After this impressive rally, can Square keep on surging?
That was the issue on Kenneth Hill’s mind as the Rosenblatt Securities analyst sat down to downgrade Square’s rating, believing its “EPS estimates remain as pessimistic as ever.” However, Hill was confronted with information which required a change of direction.
“The disconnect between near-term EPS expectations and price performance initially set us to work on a downgrade note. As we did the work to support a downgrade thesis though, we found more to the long-term story than we anticipated,” Hill commented.
With Square, as Hill found out, it is all about the Cash App, whose potential, Hill says, “can't be overlooked.”
“We were forced to re-evaluate the opportunity set and our valuation methodology, as we see Cash App revenue (ex. bitcoin) increasing by more than 3x over the next 5 years,” the analyst added.
Square’s peer-to-peer offering saw 9 million new MAUs (monthly active users) join in 2019, with figures “accelerating through the pandemic.” Ecosystem engagement has been boosted by the popular Direct Deposit feature, and although the Cash App has yet to generate positive EBITDA, Cash Card adoption and spend brings it to “the brink of materially increasing revenues.” By the end of 2025, the 5-star analyst estimates the Cash App will bring in revenue that lands “in the $3.4 billion range.”
Summing up his altered thesis, Hill said, “As Square develops, rolls out, and monetizes a slew of services across the payments and financials ecosystems, it will lay the groundwork to make the company a need-to-own name for years to come.”
All of this leads Hill to upgrade Square from Neutral to Buy, while increasing the price target from $69 to $121. What’s in it for investors? Upside potential of 4%. (To watch Hill’s track record, click here)
Among the 26 analysts tracked over the last three months, 11 say Buy, 11 say Hold, and 4 say Sell. The Moderate Buy consensus rating comes with an $89.24 average price target, which suggests downside potential of 23% over the next 12 months. (See Square stock analysis on TipRanks)