Square is scheduled to report fourth-quarter earnings next week and some analysts are pounding the table on the stock. Literally.
Calling Square (ticker: SQ) her top pick for 2021, Evercore ISI’s Rayna Kumar writes that it is the “most disruptive company in payments and banking.” She reiterated an Outperform rating on Thursday, with a $304 price target. “Disruption pays,” she writes, “pounding [the] table ahead of earnings.”
Square was ahead 3% on Friday and is up 29% this year to recent prices around $280.
The payments app is riding a strong growth wave: Its Cash App has become a popular stock trading platform. Retail trading surged during the pandemic, and Cash App may have won over clients from Robinhood after that app briefly restricted trading in GameStop (GME).
According to a small survey of Robinhood users by Mizuho Securities, nearly 40% of respondents who switched to other trading apps said they shifted to Cash App, beating other platforms like Stash, Fidelity, or TD Ameritrade (now owned by Charles Schwab ).
Bitcoin’s surging price, recently hitting records around $50,000, is also fueling gains for Cash App; users can buy and trade the cryptocurrency on the app. Square buys the cryptocurrency and resells it to users, taking a cut of transactions. The company posted about $1.6 billion in total Bitcoin revenue in the third quarter, though net revenue, after costs for the currency, was just $32 million.
Kumar expects Square to beat consensus estimates in the fourth quarter of 2020 and throughout 2021. She sees Square posting net revenue of $924 million in the quarter with Ebitda—earnings before interest, tax, depreciation, and amortization—of $160 million, ahead of consensus estimates of $141 million. She sees the firm posting adjusted net revenue of $4.3 billion in 2021, resulting in adjusted Ebitda of $825 million, 24% above consensus estimates.
Cash App may have boosted active users by 56% in January, according to Evercore surveys. The app had 33 million users in the September quarter, and Kumar expects the company to hit 40 million in the fourth quarter.
Kumar notes that Square is working to integrate Cash App with its Seller App used by merchants to process payments. The company is integrating the ecosystems through new products like Instant Payments from merchants to employees and On-Demand Pay, giving employees a way to quickly access up to $200 per pay period in Cash App.
Wolfe Research’s Darrin Peller also reiterated a bullish view, maintaining an Outperform rating and $335 target. He expects shares to “grind higher over the next several months,” fueled by Bitcoin, stock trading, and growth trends in Cash App.
“Square stands out as a material share gainer across its businesses, solidifying its status as a global leader,” he wrote in a note on Thursday.
Investors are paying a steep multiple for Square’s growth. The company is expected to earn 76 cents a share in the next 12 months, giving it a price-to-earnings ratio of 370 times.
Analysts value stocks like Square on a multiple of revenue, but that doesn’t make it much cheaper. Assuming $4.2 billion in net revenue this year, the shares trade at 66 times sales. PayPal Holdings (PYPL), by contrast, fetches 13 times sales.
Valuation is keeping Piper Sandler analyst Christopher Donat on the sidelines. He has kept a Neutral rating on the stock since initiating coverage last July. His current price target is $190.
“We’ve had a tough time putting an overweight on it, and it’s even tougher liking the valuation now,” he said. The pace of downloads of Cash App has been slowing, he points out, leading to slower growth of active users. He is also concerned about ongoing sales weakness at small bricks-and-mortar merchants such as restaurants.
“I think Square is a great growth story with a long runway but I’m uncomfortable with the valuation,” he said. Square trades at 15 times enterprise value to revenue, compared with 11 times for PayPal Holdings, which is his top pick in payments.
Square is scheduled to report earnings after the close on Feb. 23. Asked if he plans to raise his rating on the stock, Donat said “never say never …but I might be wrong on this one.”
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