Credit Karma’s Tax Prep Business Could Be Good for Square, Says Analyst

Square (SQ) stock go down too, apparently, as shareholders learnt on Friday. One of 2020’s most impressive performers saw its share price plunge by 9%, after the market reacted unfavorably to a Wall Street Journal report concerning a possible new addition to the Square ecosystem.

The article states Square is in talks with Credit Karma to acquire its tax-preparation business.

Earlier this year tax-preparation heavyweight Intuit disclosed a plan make to make Credit Karma its largest acquisition ever by offering to purchase the company for $7.1 billion in cash and stock.

As Intuit already boasts market leading tax prep software, offloading Credit Karma’s tax preparation business ahead of the deal’s close could remove any potential antitrust issues.

For Mizuho analyst Dan Dolev, the addition to Square’s growing list of services could be a positive development.

“Including tax filings in the Cash App offering can nurture the flywheel of more customers & more services with SQ having a 360 degree view of its user base, a similar approach taken by Alipay,” the 5-star analyst said. “The opportunity to expand Cash App’s ARPU is vast, as SQ eyes WFC, JPM, and Schwab, where ARPUs can range anywhere from $400-700.”

If the move is a good one for Square, then, it begs the question: why the sell off?

Well, for one the whole market was down taking virtually all stocks with it. Secondly, Dolev notes, considering Square’s poor record on the acquisition front, investors might be skeptical the new addition will be an improvement on the company’s previous underwhelming purchases.

Historically, Square has shown to be more adept at building up its core businesses rather than canny on the buying front.

“This is most notable in Caviar, which was acquired only to be divested later, as well as in Weebly & Zesty which fell short of industry leaders like WIX and GoDaddy,” Dolev said.  “In that sense, investor pushback regarding the potential M&A would be expected, especially given that this service is offered for free at Credit Karma.”

All in all, there’s no change to Dolev’s rating, which stays a Buy. The price target remains at $225 and suggests upside potential of 45%. (To watch Dolev’s track record, click here)

The majority of Street analysts remain on Square’s side. The stock has a Moderate Buy consensus rating based on 16 Buys, 6 Holds and 2 Sells. Investors are looking at upside of 12%, should the $174.41 average price target be met over the following months. (See Square stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.