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Square Stock Has Multiple Upside Catalysts
Stock Analysis & Ideas

Square Stock Has Multiple Upside Catalysts

Square (SQ) stock has been in a steady uptrend in 2021. The upside has been backed by strong fundamental developments.

It further seems that SQ stock is positioned to trend higher in the coming quarters, as healthy growth sustains. I have a bullish view on the stock.

Before looking at the organic growth factors, it seems that the company’s acquisition of Afterpay Limited is likely to be value creating. Square announced this $29-billion acquisition in early August.

Let’s discuss this acquisition, and other business growth factors. (See SQ stock charts on TipRanks)

Big Potential in the Buy-Now-Pay-Later Market

Afterpay is among the leading companies in the rapidly growing buy-now-pay-later market. The company is on a high-growth trajectory, with revenue increasing from $189 million in Fiscal Year 2019 to $693 million in FY2021.

However, the buy-now-pay-later market is still at an early stage. According to the company’s estimates, global online payments are worth $10 trillion. Of this, the buy-now-pay-later market penetration is just 2%.

Clearly, there is ample headroom for growth, and Afterpay is gradually expanding into new territories. Square intends to integrate Afterpay with its Seller and Cash App ecosystems.

It’s worth noting that Cash App already has 70 million annual active customers. Further, Afterpay has a customer base of 16 million. The integration is likely to be mutually beneficial.

Overall, it seems that the acquisition will boost growth, and deliver a positive impact on EBITDA margins in the next few years.

Cash App is a Cash Flow Machine

In June, Cash App reported 40 million monthly transacting active customers.

It’s worth noting that for Q2 2021, Cash App generated $3.33 billion in revenue and $546 million in gross profit, year-over-year increases of 177% and 94%, respectively.

Furthermore, Cash App generated $2.72 billion in bitcoin revenue, and $55 million in bitcoin gross profit.

As the number of active users swell in the coming years, the app is likely to deliver healthy EBITDA margins, and cash flow upside.

Overall, Square believes that the Cash App ecosystem represents a $60-billion revenue opportunity in the United States.

Square Banking Can Deliver Long-Term Value

In July 2021, SQ introduced Square Banking, which is intended for small businesses. The financial offerings have some attractive features that are likely to attract merchants.

As an example, Square Banking is offering a $0 opening deposit and no minimum balance. Further, any sale transaction can be instantly accessed and spent. Small businesses are also eligible for Square loans, that can be automatically repaid from sales proceeds.

It’s worth noting that in Q2 2021, SQ facilitated approximately 105,000 loans, totaling $778 million in originations. Given the attractive features of the checking account and loan repayments, this segment is likely to witness sustained growth.

Australia is already the company’s first international market for loans. In the coming years, geographic expansion is likely to ensure that healthy growth sustains in the segment.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, SQ stock comes in as a Moderate Buy, with 18 Buys, four Holds and one Sell assigned in the past three months.

The average Square price target is $313.15 per share, implying 17.5% upside potential from current levels.

Concluding Thoughts

Square has witnessed robust revenue and EBITDA growth. With the acquisition of Afterpay, sustained growth for Cash App, and with the launch of Square Banking, the company’s outlook seems bright.

SQ stock seems attractive overall, considering multiple growth catalysts.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article

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