By Emily Bary
Square Inc. capped off what one analyst called “The Year of the Cash App” with surging revenues and improved user growth for its mobile wallet, but shares of the payments company were off 8% in Wednesday morning trading as analysts debated the Cash App’s profit performance.
Mizuho analyst Dan Dolev attributed the stock’s decline to the fact that Square’s latest report “simply lacked the element of surprise,” while he argued that there was nothing fundamentally wrong with the company’s numbers. He encouraged investors to take advantaged of “a rare opportunity to buy the dip” and wrote that he sees opportunity for Square /zigman2/quotes/205989440/composite SQ -0.10% to show off improving Cash App gross profit in March after a deceleration in February.
Dolev has a $380 price target on Square’s stock and a buy rating.
See more: Square buys more bitcoin as Cash App users boost revenue
Raymond James analyst John Davis was more focused on the deceleration, writing that the Cash App’s gross profit growth slowed to 162% for the fourth quarter from 212% in the third quarter. January growth of 164% wasn’t much better than the fourth-quarter performance, he wrote, even though stimulus payments arrived in the final few days of December, and then gross profit for the first few weeks of February slowed to 130%.
“In our view, although another round of additional stimulus is almost certainly on the way, we feel the stock is priced for perfection (trading at 23x our updated 2023 estimated revenue) and believe material deceleration is likely on the horizon for Cash App as the company begins to lap the pandemic/stimulus related boost beginning in 2Q,” Davis wrote. He has an underperform rating on the stock.
MoffettNathanson’s Lisa Ellis, the analyst who deemed 2020 the year of the Cash App, was impressed with what she saw on the profit front from Square’s Cash App mobile wallet, which houses bitcoin and equity trading as well as peer-to-peer money-transfer services.
“We believe that Cash App’s total EBITDA [earnings before interest, taxes, depreciation and amortization] contribution has turned positive in 2020, but remains relatively low, at ~15% of gross profit or ~$180M (~40% of Square’s total EBITDA),” she wrote. “However, we estimate that Cash App is already generating an incremental EBITDA margin (gross profit less sales & marketing costs) as high as ~45%.”
The improving profitability in her view suggest that Square “will be able to invest $1 billion-$2 billion over the next three years in new growth initiatives (e.g., international expansion of the Seller and Cash App franchises, a consumer credit offering) while still modestly expanding company-wide EBITDA margin.”
Ellis has a buy rating and $300 price target on Square’s stock.
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BTIG’s Mark Palmer said that investors may be placing too much emphasis on the Cash App’s monetization trends and not appropriately rewarding Square for its user momentum. The company had 36 million monthly active Cash App customers in December, up 50% from a year earlier.
“At this stage in SQ’s evolution, we believe the attraction and retention of customers is of much greater importance than monetization, which we are confident that the company can increase as it introduces new products and encourages its customers to adopt existing ones,” Palmer wrote. “We note that Cash App’s customer acquisition cost was less than $5 during 2020 as peer-to-peer network effects were apparent.”
He has a buy rating and $295 price target on Square’s stock.
Shares of Square have gained 194% over the past 12 months as the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.93% has risen 20%.