Square (SQ) stock has been running wild in 2020. Boosted by the rising digital payments secular trend, handsome earnings beats and its all-conquering peer-to-peer offering Cash App, shares have gained 220% year-to-date.
So, what would you tell someone if they ask you, “Should I buy SQ right now?” For Mizuho analyst Dan Dolev the answer is quite clear — the analyst sees this stock as a flower that keeps blossoming.
The 5-star analyst reiterated a Buy on SQ shares and boosted the price target to a Street high of $300. What’s in it for investors? Possible upside of another 49%. (To watch Dolev’s track record, click here)
As with almost all the bullish forecasts for Square, the optimism is based on the outperforming Cash App.
“We see three main reasons to be incrementally more bullish on the Cash App’s medium-term monetization potential,” Dolev said. “Those reasons include: (1) Cash App is now growing in geographies traditionally dominated by Venmo. (2) Cash App rapidly diversifying away from its reliance on Instant Deposits (ID) as Cash Card, Cash for Business, and Bitcoin gain momentum. (3) Like good wine – and in theory, marriage too – Cash App’s cohorts are improving over time. They generated nearly 3x higher gross profit per user after just one year.”
Let’s take a closer look at Dolev’s reasons.
As for 1, Google search patters indicate that Cash App is slowly eating away at its rival‘s dominance – or as Dolev calls it, its “mindshare” – in densely populated markets such as New York, California and Illinois. The Cash App’s share of searches in these regions has increased from less than 40% in 2017/2018 to over 60% since April 2020.
As for 2, the data speaks for itself. Cash Card’s gross profits increased from 20% in 2018 to 27% in 3Q20, while Bitcoin’s increased from roughly 1% to 8% and Cash for Business makes up another 11%; All contributing to a decreasing reliance on ID.
Overall, Dolev estimates that in 3Q20 “ID accounted for 54% of Cash App gross profit, down from nearly 80% in 2018.”
Likewise, for 3, the data paints a clear picture. For example, in 2017, the Cash App added roughly 4 million active users. A year later the same group of users brought in an estimated gross profit per user of $20. By 2019 this cohort generated gross profit of more than $30 per user.
It’s a similar story for the 8 million users who joined in 2018. Per user, gross profit stood at $8 in 2018, but grew almost threefold to $22 by 2019.
Overall, there are plenty of Square bulls amongst Dolev’s colleagues, although some are not quite as convinced. SQ’s Moderate Buy consensus rating is based on 18 Buys, 8 Holds and 3 Sells. Given Square’s constant share gains, the $192.12 average price target suggests a 7.5% decline from current levels. (See Square stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.