Why this analyst says Square deserves a ‘buy’ rating

BTIG Financials Analyst and Managing Director Mark Palmer joins Yahoo Finance Live to discuss why Square deserves a ‘buy’ rating and break down how companies like Square and PayPal could be the new whales in the crypto market.

Video Transcript

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AKIKO FUJITA: Welcome back to Yahoo Finance Live. Let's do a quick check of shares of Square-- trading higher today, up about 5%. We've seen that stock up about 20% over the last month or so. Long-time Square bear Mark Palmer upgrading the stock to a buy rating now. He's got a price target of $220 on Square.

Let's bring him in. He is BTIG's financial analyst and managing director. Mark, you've got a lot of buzz for this because you have been so bearish on the company for so long. But it sounds like you think the Cash App is really what it's all about.

MARK PALMER: Yes. First of all, thanks very much for having me. Yeah, the Cash App is a game changer for Square. It's a game changer, frankly, for a lot of people in the United States. There are 85 million unbanked and underbanked consumers in the United States.

And Cash App is helping to address their needs, basically serving as a proxy bank account when they don't have another option. And that really came to the fore when the stimulus payments were being distributed, because many unbanked and underbanked folks who would have had to wait for a check were able to sign up for the Cash App and get their money much more quickly as a consequence.

So that brought a lot of users into Cash App. What you're seeing now is, with Bitcoin really taking off, the Cash App enables those who want to buy and sell Bitcoin to do so through its platform. So you really have a barbell effect, between the unbanked and unbanked on the one side and traders of cryptocurrency on the other. And it's a very potent combination.

AKIKO FUJITA: You know, Mark, like so many trends that we've seen throughout the pandemic, the question then becomes, how sticky is this? What we've gone through has brought so many consumers in, but how big of a growth driver do you think this app is going to be for Square, at least in the medium term?

MARK PALMER: Well, we think that the Cash App puts Square in a position to become a super-app and go well beyond simple facilitation of payments in a peer-to-peer setting to something much, much bigger, along the lines of Alipay China.

And just today, we've just heard announced that the Cash App has acquired Credit Karma's tax assistant platform. So this is just another service which is being added to the Cash App as they continue to build out into what's going to be, ultimately, a much more comprehensive platform.

I think at the end of the day, though, the growth that you could see in Cash App-- just tapping into, again, those unbanked and underbanked folks on the one hand and Bitcoin users on the other-- is a long runway that should continue to drive the stock, in our view.

DAN ROBERTS: Mark, Dan Roberts here. Good to talk to you again.

MARK PALMER: Nice to talk to you.

DAN ROBERTS: Would you say that Square's kind of field of competitors is shifting now? Or certainly, it has added a number of new, younger companies. Because I remember it wasn't so long ago that people who were bullish on Square would talk mostly about Square because of its point of sale hardware and also its software to benefit merchants.

And so it was really competing with some of those older, big, international giants that maybe weren't household names. Now sometimes when you see Square upgraded-- and often Cash App is the reason-- you hear about Shopify soaring for the same reason. Shopify and Square stock have actually really moved in lockstep in 2020, mostly because they both have helped small businesses digitize during the pandemic.

So who should we now think of as Square's biggest competitors?

MARK PALMER: Yes, it's a great question. If you look at the seller ecosystem, which is the other half of Square beyond the Cash App, that is where the company got started. It was helping small and medium sized businesses to accept payments in a much more economical manner.

I mean, if you go back to the beginning, it was the founders of Square going to a craft fair and discovering that they couldn't pay with a credit card. And they wanted to be able to do so and help merchants to do that sort of thing.

Now you follow that up to the present, and Square is dealing with a lot of larger merchants. They still deal with the micro merchants, but they've gone upmarket in terms of who they are serving. But an important distinction here is that Square is still focused very much on what's known as card-present transactions. This is point of sale where you're actually in person.

And frankly, those merchants who are trying to drive business as much as they can-- the ability to accept credit cards and have other functionality is crucial at a time when they're simply trying to survive. If you look at others in the space, whether that be Shopify or Stripe, a lot of that is card not present. It's online e-commerce. And it's really a different part of the market.

So if you think about Stripe and Shopify, you think really more online. You think about Square, it's helping those smaller merchants in the retail space, that are still trying to make it during the pandemic, to do so.

DAN ROBERTS: And Mark, quickly let's end on this. With this upgrade to Square, obviously I would imagine that you see a lot of good in Jack Dorsey's recent leadership of the company. It's also become a bigger story, though, than ever, I would say, the question of how much longer Dorsey can be CEO of both Twitter and Square-- of course, two very different companies, but two publicly-traded companies.

And I just wonder where you stand on his current dual CEO roles at those two companies in the near future.

MARK PALMER: Well, frankly he's been able to manage that quite well, in large part because he's got a very deep bench on both sides. Now I don't cover Twitter, but I can tell you that from Square's perspective, he's got a very astute set of folks who are helping to run things, particularly as they continue to build out the Cash App.

So he's been able to juggle that for some time. And again, really what it comes down to is Dorsey providing the vision and having a team around him that can execute that vision.

AKIKO FUJITA: Mark Palmer, BTIG financial analyst and managing director, it's good to talk to you. Thanks so much for stopping by.

MARK PALMER: Thank you.