The market appears in the midst of a correction, with sharp pullbacks across the board. The tech sector looks particularly vulnerable as valuations have soared during the stock market’s extended rally.
One such highflying tech name is Square (SQ). The fintech player has benefited from strong Covid-19 tailwinds and the pivot toward digital payments, in the process accumulating share gains of 212% over the past 12 months.
Which begs the question, is Square overvalued? Some would say so, but not Mizuho’s Dan Dolev. In fact, the opposite rings true, according to the 5-star analyst, who claims Square is “simply undervalued.”
Heading into today’s 4Q20 earnings, Dolev believes the best is yet to come. The analyst reiterated a Buy rating on SQ, while bumping the price target up from $300 to a Street high of $380. Investors could be pocketing gains of 53%, should Dolev’s thesis play out over the coming months. (To watch Dolev’s track record, click here)
“With <3% penetration of a $165bn TAM, enhanced momentum with Bitcoin’s ascent, and an inflow of equity traders post-GameStop, SQ is barely scraping its full potential, in our view,” Dolev said.
At the heart of the bullish thesis for Square is the all-conquering peer-to-peer app Cash. Dolev goes as far as to call the company’s prize asset, the “ultimate ‘Super-App.’”
By 2031, at a CAGR (compound annual growth rate) of 35%, Dolev thinks the Cash App can generate gross profit of more than $30 billion.
This figure actually takes into account a deceleration of the app’s growth.
“With a nearly 200% CAGR since 2017, Cash App has been expanding its share of its $63bn TAM at an accelerating pace,” Dolev notes.
The Cash app’s share of the market grew from 0.1% to 0.7% between 2017 and 2019, indicating roughly 30bps of share expansion per year.
Cash App’s share of the market will increase to 1.3%, on the assumption its 2020 gross profit reaches $1.3 billion.
“This implies expansion of 90bps, or 3x faster than the 2017-2019 rate of expansion,” the analyst added.
But are the forward estimations reasonable? If the Cash App can grow its ARPU (average revenue per user) to between the $400-700 range which is like the levels attained by JPM, WFC, and Schwab, the estimate, according to the analyst, might be conservative.
“For instance,” Dolev said, “If SQ achieves 50% of average major bank ARPU while approaching PYPL’s current US account base of ~150mn, implies gross profit of $40-45bn.”
So, there’s Mizuho’s view, but what does the rest of the analyst fraternity think? All in all, the Street maintains a positive, although more reserved stance. Based on 24 analysts tracked by TipRanks in the past 3 months, 15 say Buy, while 9 suggest Hold. Meanwhile, the average price target stands at 263.10 and implies a modest ~5% upsid from current levels. (See SQ 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.
