Today, Square’s (SQ) co-founder, Jack Dorsey tweeted from his official Twitter handle that SQ is looking at creating a new business that will unify its Seller, Cash App, and Tidal businesses, and focus on “building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services.”
Dorsey added that the primary focus of the platform would be on Bitcoin. The company’s investment in Bitcoin has paid off handsomely, as Bitcoin revenues made up 69.4% of total revenues in Q1. Square has invested $220 million in Bitcoin so far.
Interestingly, while SQ focuses on new business lines, Mizuho Securities analyst Dan Dolev seems to think that Square’s Cash App offers vast upside potential. Yesterday, Dolev reiterated a Buy and a price target of $380 (61.6% upside) on the stock.
Cash App
The company’s business lines include Cash App, Square Seller products, and music-streaming service, Tidal. Earlier this year, SQ acquired a significant ownership stake in Tidal in a cash-and-stock deal valued at $297 million.
Through the company’s Cash App, people can store, send, receive, spend, and invest money. SQ has also facilitated the buying of Bitcoin through its Cash App and applies only a small margin to the market cost of Bitcoin.
The Cash App made up more than 50% of the company’s total revenue of $5.06 billion in Q1. (See Square stock charts on TipRanks)
Analyst Dolev stated that SQ’s Cash App “may be en route to becoming the ultimate neo-bank and the money center bank of the future. This could make buying SQ analogous to buying J.P. Morgan in 1871.”
Where Does the Hidden Potential of Cash App Lie?
Dolev believes that Cash App has the potential to earn Average Revenue Per User (ARPU) that could range between $150 and $200, three to five times above current levels. He thinks that SQ can do this by adding a range of products to the app, including insurance, tax services, and home equity lending.
Furthermore, Dolev considers Payday Lending a huge opportunity for SQ and added that with an annual percentage rate (APR) ranging between 60% to 65%, “a Cash App lending product may prove to be an island of transparency in the rough waters of the $30-40bn US payday lending industry, where APRs can exceed 400%.”
The analyst is also of the view that the acquisition of Tidal “expands Cash App’s ecosystem, provides new creativity and potential use cases around cryptocurrency, and boosts engagement.”
Dolev said that with a current user base that ranges between 30 and 40 million, Cash App is currently tapping “less than 10% of its potential user base.” The analyst estimates that the total addressable market (TAM) for bank accounts in the U.S. is 400 to 500 million accounts, offering upside potential of more than 10 times its current user base.
On another positive note, the analyst said that even if SQ penetrates around 15% of the total bank accounts TAM in the U.S. and reaches an ARPU of $175, it would indicate a “nearly $12bn in medium-term gross profit potential. This is ~6x above Cash App’s 1Q21 gross profit run-rate of ~$2bn. ”
In conclusion, Dolev said, “SQ is best positioned to benefit from SMB [small-to-medium business] dislocation, in our view. Superior unit economics for its Cash App could help drive 4x growth in GP [Gross Profit], by our calculations…Our $380 PT is based on our base case 10-year Cash App & Seller ecosystems terminal value, which implies both ecosystems near their full potential to penetrate major payments & software revenue sources.”
Consensus among analysts on Wall Street is a Moderate Buy based on 17 Buys, 4 Holds, and 1 Sell. The average Square price target of $286.90 implies approximately 22% upside potential to current levels.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
