Mizuho analyst Dan Dolev raised Square's target ahead of results, saying the stock 'is simply undervalued'
Square (SQ) is scheduled to report results of its fourth fiscal quarter after the market close on February 23, with a conference call scheduled for 5:00 pm EDT. What to watch for:
1. TARGETS UPPED AHEAD OF RESULTS: On Monday, Mizuho analyst Dan Dolev raised the firm's price target on Square to $380 from $300, while keeping a Buy rating on the shares. The analyst believes Square "is simply undervalued." Dolev's terminal value discounted cash flow analysis shows that by 2031, Cash App and Seller GP may exceed $30B and $6B, respectively. His base case implies a share price of $380 and his bull case implies over $650. With less than 3% penetration of a $165B total addressable market, enhanced momentum with bitcoin's ascent, and an inflow of equity traders post-GameStop, Square is "barely scraping its full potential," Dolev contended.
Keeping an Overweight rating on the shares, Barclays analyst Ramsey El-Assal also raised the firm's price target on Square to $320 from $260. The recent "success and rapid growth" of Square's Cash App has left many investors asking about the longer-term potential of this business, El-Assal told investors in a research note. Based on his analysis, El-Assal thinks 2025 revenues of $10B-plus are feasible, which would represent 50% annual growth from 2020. Cash App revenue has grown dramatically in the last few years, but the product is still relatively young, the analyst added.
2. SQUARE BENEFITS FROM TRADERS LEAVING ROBINHOOD: Mizuho analyst Dan Dolev said earlier this month that his survey of retail stock traders showed Square's Cash App benefited most from the recent drama surrounding Robinhood's trading restrictions on stocks like GameStop (GME). Nearly 40% of the 80 survey respondents who switched to other retail trading apps said they shifted to Cash App, exceeding users leaving for other retail trading apps like Stash, Fidelity or TD Ameritrade, Dolev told investors in a research note. Of those who switched to Cash App, about one-third were net new users, and nearly three-quarters expressed interest in additional products such as bitcoin and Cash Card, the analyst added. He also noted that nearly 50% of those who reported leaving Robinhood said they would consider returning at some point.
3. RISING BITCOIN PRICES: Commenting on the rising bitcoin prices last month, Mizuho analyst Dan Dolev told investors that he sees it as a "boon" to Square's revenue. The analyst estimates that if bitcoin reaches $100,000 by year-end, it could drive nine-times growth in Square's bitcoin gross profit. However, if bitcoin dropped to $10,000, its profit may still double, helped by growing user base and higher engagement, Dolev contended.
4. FRAUDULENT PPP SCHEMES: Criminals are laundering illegally obtained funds meant for COVID-19 relief through the most popular apps for legally sending and receiving money, CNBC's Scott Zamost, Kayla Tausche and Karina Hernandez reported back in November, citing law enforcement officials. Square's Cash App, Venmo, Zelle and PayPal (PYPL) have become portals to easily move money, making transactions more difficult to trace, the authors noted. “I’ve never seen, in my 28 years’ experience, the amount of fraud that I’ve seen currently,” Roy Dotson, an assistant to the special agent in charge of the Secret Service, told CNBC. “And I think that’s just based sheerly on the amount of money the CARES Act allocated into COVID-related fraud and stimulus.”
Following news reports that the Secret Service has begun investigating suspected fraud related to PPP and Unemployment Insurance Relief programs that include P2P money transfer services playing "an important role in the associated laundering," Morgan Stanley analyst James Faucette said he believes Cash App's convenience "may make it the preferred platform for bad actors." While mitigating fraud risk is a key differentiator and competency for Square, the eventually needed work to address anti-money laundering and "Know Your Customer" issues could slow its Cash App growth, Faucette contended. The analyst cautioned "investors should be prepared for that downshift."