Why Square Is A 'Need-To-Own' Stock For Years To Come

After being on the sidelines for payment processor Square Inc SQ, one analyst at Rosenblatt Securities turned bullish Wednesday. 

The Square Analyst: Kenneth Hill upgraded Square from Neutral to Buy and increased the price target from $69 to $121. 

The Square Thesis: Square's Cash App revenue excluding bitcoin is likely to increase more than three times over the next five years to $3.4 billion as the platform gains traction as a primary spending tool, Hill said in the upgrade note. (See his track record here.)

The analyst said he expects continued user uptake on the Cash App to drive further engagement.

Customers are increasingly gravitating toward Square's neobanking services, as reflected by the 9 million new monthly active users added in 2019 alone and acceleration through the pandemic, he said. 

Hill sees offerings like direct deposit boosting ecosystem engagement and Cash Card adoption and spend.

The analyst expects second-quarter gross payment volume to have declined 23% year-over-year compared to his previous expectation for a 26% decline. Downside seems protected due to Square enabling businesses to get paycheck protection program loans and a nimble shift to online selling, he said. 

Rosenblatt is of the view that Square's downside risks are limited, with investors using recent pullbacks to gain exposure to a long-term disruptive force.

"Furthermore, as Square develops, rolls out, and monetizes a slew of services across the payments and financials ecosystems, it will lay the groundwork to make the company a need-to-own name for years to come," Hill said. 

Instead of focusing on next-12-month EPS multiples, Rosenblatt said it is moving to a sum-of-the parts valuation based on the Seller and Cash App ecosystems — models driven by key performance indicators like Seller payment trends, Cash App active users and overall monetization efforts.

SQ Price Action: At last check, Square shares were adding 4.69% to $109.97. 

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Photo courtesy of Square.