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Oppenheimer upgrades Square to ‘outperform’, sets $185 price target

Oppenheimer upgraded Square to ‘outperform’ from ‘perform’ and introduced a $185 price target. Oppenheimer credits the COVID-19 pandemic for the vote of confidence in the payment processing company, citing that it is pulling through a massive shift in digital commerce requiring merchants to rapidly adopt omni-channel solutions. Yahoo Finance’s panel breaks down the details.

Video Transcript

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- All right. Welcome back to The Final Round here on Yahoo Finance. Time now for our Call of the Day. Today, we are talking about Oppenheimer's latest on shares of Square. The firm's upgrading the stock to an outperform rating, putting a $185 price target on the stock.

And Dan Roberts, I know you are writing about this call from OpCo on Square. And I guess, as they see it, basically, Square finds themselves-- I mean, I don't want to make too many comparisons to this company, but in a Shopify-like situation where they are-- they're benefiting from everyone else moving online and sort of catching up, maybe, to where Square had positioned themselves. Is that maybe a fair way to kind of enter into where Oppenheimer gets so bullish on the stock?

DAN ROBERTS: Well, I think that's fair because, increasingly, Shopify and Square are competitors, although, probably, Square would say, well, wait a minute. We came first long before Shopify. So more people, I think, might compare Shopify, these days, to what Square has done.

But look, all of the things highlighted in this very bullish note are the things that we've always talked about with Square-- the ecosystem-- and that is kind of Square's favorite term for the idea that it serves both sides of the sale equation. It serves sellers, i.e. merchants and mostly small businesses, and then it serves consumers-- shoppers-- either at point of sale when you use Square products or with Cash App.

But really, this note is based around Cash App and its growth, which-- you know, I think, in New York, we can tend to be very regional-focused and think that Venmo is the "end-all, be-all." But Cash App is number one in a lot of markets, and it's grown very nicely.

And then, interestingly, some real mention here in this note of the Bitcoin gains within Cash App, which we know is a obsession of Jack Dorsey's. Some have criticized it is too much of an obsession. But last quarter, Square saw profit from allowing Bitcoin trading in Cash App. Its profit from Bitcoin was about 17 million-- tiny, but up 710% from its profit from Bitcoin a year earlier. And its Bitcoin revenue is up 600%. Now, that was because Bitcoin prices have been up. And with the pandemic, more people were interested.

But all of this aside, what this note really is, to me, is a bet that small businesses emerging from the pandemic are going to need to digitize their businesses. Now, of course, we already know that. I mean, you know, if you didn't realize before the pandemic that e-commerce was where everything was headed, well, you were sleeping. But now everyone sees it.

I mean, we've talked so much about the huge gains that big, big retailers have seen with e-commerce amid the pandemic-- Walmart, Target, Best Buy, Urban Outfitters, Dick's, Etsy, which is online-only, Wayfair, which is online-only. Now, of course, those are bigger businesses. But point being, the lesson applies to small businesses-- the types of merchants that are Square's bread and butter-- as well.

A ton, unfortunately-- hundreds of thousands of small businesses have gone out of business amid the pandemic. But those that are still around and have survived are going to have to really focus on e-commerce coming out of the pandemic. And so this note is a bet that Square can be a winner by serving those businesses that'll be prioritizing e-commerce. It's got a hefty price target on the stock of, like, 185, whereas the all-time high is 166. And Square, interestingly-- and I would argue, kind of quietly-- is up, like, 170% in 2020 so far.

- And then, Dan, you know, a big part of this note is the Cash App for Square. And I guess-- I mean, am I understanding this incorrectly, maybe, as someone who doesn't follow the company as closely as you do? I'm like, well, I use Venmo, so that's basically-- I won't use Cash.

But it seems like there's a much larger opportunity here for Square to kind of use that ecosystem of users. And they have a great breakdown of profit by cohort. And they're clearly getting better at expanding what is in the Cash App. And that really seems to be a linchpin in this call.

DAN ROBERTS: Yeah, absolutely. And in fact, it's really all about the digital-wallet race, right? And I'm glad you mentioned that. Here's the key line with what you're asking about. So "we believe, by reinvesting profits from prior Cash App cohorts combined with its seller ecosystem"-- I mentioned that-- "Square can develop significant network effects and products that'll be challenging for other neobanks to replicate in the digital-wallet space."

So really, an advantage that Square has over banks-- and we know that everyone is in this digital-wallet race. Cash App, now-- you know, I mentioned the comparison to Venmo. But really, it does a lot more than just peer-to-peer payments. You can withdraw money. You can use it as a debit card. There's a Cash App debit card. And as I mentioned, you can buy and trade Bitcoin in there. So a number of these new features, steady growth. Of course, not without its competitors in the digital-wallet space. But that is a key to the note as well.

- Yeah. I mean, Dan, in many ways, you can also compare it to Robinhood. You can also compare it to Acorns. You can think about it as supposedly the one-stop shop and, as you say, that ecosystem that's supposed to encapsulate all of your fintech needs.

I do want to bring up some news today as well. Square did announce a commitment to invest $100 million into Black communities. Of course, Jack Dorsey has been very vocal about supporting Black Lives Matter, also committed a billion dollars of his own Square stock in coronavirus-related issues. A lot of them focus on underserved, underprivileged communities.

And I think this is particularly interesting, guys, because we've talked about so-called conscious capitalism for a decade now, right? Supposedly this has been in the works. It's the underpinning of the future of stakeholder capitalism.

But I do feel like we have to give Dorsey some credit here because he is baking it into the business model, right? In the same way that Netflix also pledged, similarly, in addition to Reed Hastings and his wife committing to HBCUs and making sure that the pipeline can broaden out, right? This is not just putting a Band-Aid on things.

So I appreciate the fact that, you know, this sort of divvying up-- it's about 3% of its cash balance right now-- into different buckets, right? To really galvanize the community, and underserved communities, and Black small businesses. And so often, we found that small businesses in the Black community-- they end up serving the larger population around them. It's not just, OK, we support one small store, and that's where my money goes.

So I do feel as though, as much as we kind of bemoaned the fact that a lot of tech leaders had created those initial pledges after George Floyd's death, it's clear that there are some leaders out there who take this seriously, and this is going to be a lifelong commitment. And it's interesting to see Square kind of follow that infrastructure.

- Yeah, I think it's going to be very-- it'll be interesting to see, as, I think, our peer group grows into some of these leadership-type roles along with these businesses, how much these plans remain in place. I mean, if you think about the construction of a lot of these major companies we talk about, you know, basically everyone who's going to be making decisions-- consequential decisions-- is probably 15 to 20 years older than us.

But I think that our peer group-- that they're certainly looking towards the future of their workforce, the future of kind of whatever we're calling this American capitalism system we've got. And they're thinking that it's going to have to be something different. And I would agree. While Jack's kind of other endeavor of Twitter is a product absolute nightmare, even though we use it all the time, what he's done at Square and the things that he stands for are certainly very interesting and something I think we're going to be following for quite a long time.