Bulletin
Investor Alert

The Ratings Game

May 7, 2021, 10:57 a.m. EDT

Square’s two main businesses are roaring. Now analysts see ‘tremendous potential’ in linking them

By Emily Bary

Both sides of Square Inc. seem to be clicking as the economy strengthens, and now analysts are excited about the possibilities for Square as the company begins to connect its merchant and Cash App businesses together.

Shares of Square (NYS:SQ) are up 6% in Friday morning trading after the payments company posted first-quarter results that highlighted rebounding merchant dynamics as well as continued momentum for the consumer-facing Cash App wallet , which has proven increasingly popular during the pandemic.

Though Square’s merchant and Cash App businesses operate separately, analysts have long been excited for the company to start driving links between the two entities, and the company gave a glimpse of that in its Thursday shareholder letter. Square discussed how, in the first quarter, it integrated its merchant loyalty program into the Cash App, so that customers who earn rewards shopping at Square sellers can manage their rewards from within the mobile wallet.

“We think one of our superpowers is the fact that not only do we have an ecosystem on the seller side that serves multiple verticals at once but we also have the buyer side in Cash App, and our goal over time is to realize more of these connections,” Chief Executive Jack Dorsey said on Square’s earnings call. He sees “a ton” of opportunities for links between the two businesses, also highlighting usage of Cash Card debit cards at Square merchants.

“We think this is likely to be one step in a longer-term move by Square to more closely integrate its two platforms over time,” Guggenheim analyst Jeff Cantwell wrote in a note to clients. “Likely, the Loyalty integration will help grow Cash App balances and drive more frequent engagement with Cash App.”

He rates the stock a buy and raised his price target to $308 from $292.

MoffettNathanson analyst Lisa Ellis was also enthused by the possibilities for future integrations between Square’s merchant and consumer businesses.

“We believe that the most natural path Square can take (and likely will take) to the integration of the two ecosystems is by assigning each of the Seller merchants a Cash App business account, and (as it has started doing with the Square Loyalty initiative) actively marketing Cash App to consumers making payments at Square sellers,” she wrote in a research note.

Ellis sees “significant strategic value…in two-sided networks” and thus “tremendous potential in further integration of the two ecosystems.”

More synergies between the businesses could help drive margin improvement, she reasoned, since she said the Cash for Business product carries a higher transaction margin than traditional seller payments do. Better integration of the Cash App into the seller ecosystem could also drive more payment flexibility for merchants and customers.

She rates the stock a buy with a $300 price target.

While analysts mainly focused on the opportunities for connections between the Cash App and seller businesses, Dorsey highlighted on the earnings call that he eventually sees room for links with Square’s third and newest business as well. The company recently acquired a majority ownership stake in the Tidal music-streaming service and the potential to tie together all three ecosystems “makes that acquisition so compelling for us,” he said.

Bernstein analyst Harshita Rawat wrote that Tidal “is likely more of an optionality and a potential driver of engagement within Cash App versus a meaningful revenue driver in the near-term. She highlighted Dorsey’s commentary about what she called the “cultural intersection between Cash App customer base and Tidal.”

Aside from cheering connections between the various Square businesses, Rawat is excited about the numerous “un-pulled levers” that she sees for the Cash App business, including consumer lending, expansion of crypto-related services, and some integration with Square’s recent purchase of Credit Karma’s tax unit, which “at the very least” could help Cash App users get their tax refunds through the platform, Rawat argued.

She has an outperform rating on the stock and a $300 price target.

Still, there were some doubts about Square’s ability to maintain its momentum.

“Going forward, comps will become significantly more difficult as the company lapses the pandemic fueled growth in ’20, and with Cash App now composing likely >70% of the current valuation, we believe Cash App growth will need to meaningfully exceed updated expectations as growth decelerates for the stock to re-rate materially higher,” wrote Raymond James analyst John Davis, even as he acknowledged that the latest results were “strong.”

Davis rates Square shares at underperform.

The stock has gained 218% over the past 12 months as the S&P 500 (S&P:SPX) has risen 47%.

Link to MarketWatch's Slice.