Square Inc (NYSE: SQ) shares were up another 3.2% on Thursday and have more than tripled year-to-date, but one Wall Street analyst said there is plenty more upside ahead for the popular payment stock.
The Square Analyst: Mizuho analyst Dan Dolev has reiterated his Buy rating for Square and raised his price target from $225 to $300.
The Square Thesis: Dolev said there are three primary reasons he is bullish on Square.
First, Cash App is expanding its business into regions that have previously been dominated by Paypal Holdings Inc (NASDAQ: PYPL) app Venmo. In 2017 and 2018, Google there were more than 50% more searches for Venmo than Cash App in the 15 most populated U.S. states. In 2019, Dolev said searches for the two apps were roughly equal in these 15 states.
Second, Cash App’s business is diversifying away from its reliance on Instant Deposits given growth in Cash Card, Cash for Business and Bitcoin revenue. Instant Deposits accounted for about 80% of Cash App gross profit in 2018. Dolev estimates that percentage was down to just 54% in the third quarter of 2020.
Finally, Cash App is becoming more profitable over time, generating three times as much gross profit per user than a year ago. In 2018, Cash App added an estimated 8 million active customers, which generated about $8 per user in gross profit that year. In 2019, those same users generated about $22 per user in gross profit.
Looking ahead, Mizuho is projecting Cash App will have 65 million active users by 2023 generating gross profit per user of about $75.
“Our unit economics analysis points to ample gross profit upside from current levels from about $2.8bn in 2020 to $7.7bn by 2023,” Dolev wrote in the note.
Benzinga’s Take: There’s no doubt Square is putting up some impressive growth numbers, including 139% revenue growth and 24% net income growth in the third quarter. However, with the stock up more than 200% in 2020 and trading at 162 times forward earnings estimates, Square will need to continue to maintain that growth to support its valuation.
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