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Square Stock at $371 a Share? This Analyst Thinks It’s Possible
Stock Analysis & Ideas

Square Stock at $371 a Share? This Analyst Thinks It’s Possible

It’s been a month and a half now since Square (SQ) shocked the “buy now, pay later” (BNPL) market with its announcement that it would acquire Australian BNPL player Afterpay in a $29 billion deal. The deal hasn’t closed yet — and won’t before perhaps Q1 2022. Nevertheless, in anticipation that the merger will clear regulatory hurdles and close as expected, Evercore ISI analyst David Togut took a closer look at the likely scenario that will emerge once Square gains control of Afterpay a few months from now.

Hint: Togut thinks it will be good news for Square, and is doubling down on his Outperform (i.e. Buy) rating on the stock, and raising his price target $10 to $371 as a result. (To watch Togut’s track record, click here)

Considering Square and Afterpay as a single hypothetical “combined company,” Togut estimates that by 2023, the new company will be able to accumulate approximately $563 million worth of “revenue synergies” as former clients of one company (or the other) begin to patronize the other company (or the one) as well. This new and improved Square, says Togut, should thereby be able to accelerate its gross profit growth rate to 31% — thus growing even faster than Square was growing as a solo operation. At the same time, the analyst sees cost of goods sold by the combined company falling by $34 million, resulting in a total merger “synergy” of $597 million.

Does that prediction seem a bit too “pie in the sky” to be true? Could Square really get itself nearly $600 million in extra rewards — annually — by 2023, on top of the $627 million or so in revenue that Afterpay brought in on its own last year? Perhaps anticipating such skepticism, Togut showed his math, like so:

  • Assuming 5.8 million Afterpay consumers become Square Cash App users as well, and contribute the $38 in average annual revenue that other Cash App users currently contribute, this would yield $220 million in new revenue for Square in 2023.
  • Conversely, if 5.5 million Cash App consumers become Afterpay users as well, and contribute the $43 a year that Afterpay is accustomed to receiving, this will add $236 million more in 2023 revenue.
  • If only 5% of Afterpay’s “non-enterprise” merchants begin using Square — that’s another $232 million in extra revenue.
  • And if “a majority” of Square sellers begin offering BNPL service — that’s $33 million more.

Togut then subtracts $158 million from his estimate in anticipation that Afterpay will stop charging late fees on purchases to match a similar move by competitor PayPal, and adds in $34 million from cost savings on Afterpay sales that are “funded by Cash App,” and you arrive at the analyst’s total expected benefit for the combined company: $597 million.

Assuming revenues surge, and costs fall as Togut expects them to, the analyst believes that by 2023, Square will generate $9.2 billion in gross profit, and $1.2 billion in net profit. For whatever reason, he then elects to value the stock on its gross profit rather than its net profit, arguing that Square deserves to be valued at 26 times the former number — roughly $240 billion, which works out to twice what the stock costs today.

So, that’s Evercore’s view, what does the rest of the Street have in mind for Square? Based on 18 Buys, 4 Holds and 1 Sell, the stock currently has a Moderate Buy consensus rating. The forecast is for shares to appreciate by 23% over the coming months, given the average price target clocks in at $314.05 (See SQ stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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.

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