Why Square Is Guggenheim's Top Fintech Pick

Square Inc SQ is a lot more than a simple payment processor, in Guggenheim's view: the company's ever-expanding list of products and services makes it the analyst firm's "highest conviction name in fintech."

The Analyst

Guggenheim's Jeff Cantwell maintained a Buy rating on Square's stock with a price target lifted from $75 to $100. Gunggenheim named Square a "Best Idea" after meeting with CFO Sarah Friar.

The Thesis

The combination of a strong fundamental outlook and the ability to deliver earnings beats makes Square a "best idea," Cantwell said in a Wednesday note. (See his track record here.)

The case for upside to estimates is most notable in the subscription and service-based business, which is likely to generate $1.02 billion in 2019 revenue — 17 percent above the consensus estimate, the analyst said. In its recent second-quarter report, Square reported S&SB revenue of $134 million, beating consensus estimates from a year ago by 52 percent.

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Square's Cash App boasts a "butterfly effect" that's underappreciated by the Street, Cantwell said. Users download the app for one specific reason — such as peer-to-peer transfers, instant deposit and buying bitcoin — but over time, Square will continue introducing new features that could eventually include high-demand services like consumer finance, investing and cross-border transactions, he said.

This "butterfly effect" is expected to be particularly popular among the "underbanked" segment, including millennials, gig workers or anyone who prefers to use products and services outside of the traditional banking system, Cantwell said.

Square's management can take the Cash App's "butterfly effect" and duplicate a similar model in other verticals with high amounts of stickiness, the analyst said. For business owners, access to multiple "one-stop-shop" products and services implies Square will gain a higher percentage of merchants' total operating expenditures over time, he said.

Price Action

Square shares were trading up 4.7 percent to $84.59 at time of publication, hitting a new all-time high.

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Photo courtesy of Square.