The verdict on Square’s first-quarter results is in: Wall Street is impressed.
Several analysts raised their estimates and price targets on Square (ticker: SQ) after the company delivered a knockout first quarter, beating consensus estimates for revenues, earnings, and operating margins.
The stock rose 6.2% in morning trading on Friday to around $237.
Square didn’t provide much guidance in its earning release or call with analysts, citing uncertainty over the pace of reopening. The company expects operating expenses to be higher than it had forecast, partly because it is building out services like its new music streaming app, Tidal, acquired from Jay-Z for $300 million.
The company also said that April’s payment volumes and gross profit growth would be smaller than in April 2020, when government stimulus payments provided a one-time boost.
The bull case for the stock is that payments volume is picking up as brick-and-mortar stores reopen and consumer spending accelerates amid an economic recovery.
Square is also riding the Bitcoin wave. It has invested more than $470 million in the cryptocurrency directly and brokered transactions on its Cash App that were worth $3.5 billion in the quarter. Square only made a 2% return on its Bitcoin trading volume, worth $75 million in the quarter.
Square CEO Jack Dorsey is staking the company’s growth on Bitcoin, aiming to make transactions in the cryptocurrency as seamless as those with cash for businesses and consumers.
“We see Bitcoin as the internet’s potential to have a native currency,” he said on a call with analysts. “We want to further that as much as we can.” He added that Bitcoin “removes a bunch of friction from our business,” saying “you should see more activity from us over the year towards this goal.”
Square’s Cash App can now be used to send Bitcoin directly to friends at no additional charge—making peer-to-peer transactions relatively painless. Square has also started offering Bitcoin “boosts,” or rewards, for using its Cash debit card. The card offers instant discounts at various merchants—20% off at a restaurant, for instance, or a discount on a Lyft fare. Some of those boosts may now be coming in Bitcoin.
Analysts are applauding Square’s crypto plans. While Dogecoin is currently grabbing the crypto spotlight, for Dorsey “it is Bitcoin first and foremost as the native currency of the internet,” wrote Mizuho Securities’ Dan Dolev. “If he is right, this should have future competitive advantages for Square vs. competitors.”
Other analysts like the fact that Square is connecting its two payment ecosystems: Seller, for merchants, and Cash for consumers. Square is now marketing its Cash App to businesses, and that segment grew rapidly in the quarter with payment volume up more than 200% year over year, though it remains a small contributor to revenue and gross profit.
“Cash for Business’ strategic value significantly exceeds its current financial contribution,” wrote MoffettNathanson analyst Lisa Ellis. She sees the service capturing more e-commerce and digital payments, and noted that it is highly profitable with margins that are double the core Seller business. She sees Cash for Business contributing $720 million to gross profit by 2024, or 8% of the total, up from an estimated $164 million last year, or 6% of the company’s $2.7 billion in gross profit.
Ellis also raised her 2021 forecasts for gross profit and earnings before interest, taxes, depreciation, and amortization, or Ebitda, by 4% each. She lifted her 2022 calls for those numbers by 3%, reiterating a Buy rating on the stock and a target of $300 for the price.
Guggenheim’s Jeff Cantwell also raised his estimates, comparing Square’s two-sided ecosystem of Sell and Cash to the NBA’s “splash brothers” Klay Thompson and Stephen Curry.
“With Seller improving, Cash App in strong form, and the two ecosystems continuing to find new ways to team up …we see reasons for optimism as we contemplate what should be an increasingly healthy ’21E/’22E for Square,” he wrote. He raised his forecasts for revenue and earnings for 2021 and 2022, and increased his target for the stock price to $308.
Susquehanna Financial analyst James Friedman also lifted his forecasts, reiterating a target of $315 for the share price. The first quarter was “so good we are raising Q2 and flowing through upside to both 2021 and beyond,” he said.
Square’s stock hasn’t been a big winner lately. Its valuation remains steep amid a market shifting out of tech and into value and cyclicals. Square’s enterprise value is 93 times the Ebitda expected for 2022, according to FactSet. PayPal Holdings (PYPL), by contrast, goes for 40 times.
Despite the latest rally, the stock is down 1% in the last three months versus an 8% gain for the S&P 500 and a flat return for the Nasdaq Composite Index.
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