Square Inc (NYSE: SQ) shares were trading 3% higher Thursday after Mizuho analyst Dan Dolev said there is more upside ahead for the stock of the digital payments company.
Having previously valued the stock at $225 a share, Dolev, who reiterated his “Buy” rating for Square, now thinks the name is worth $300, representing 62% upside to Wednesday’s close.
Square has been a solid gainer in 2020, soaring more than 182% year-to-date and 204% year-over-year. The overwhelming catalyst for the stock’s surge has been Square’s Cash App, a mobile payment service that accounted for 70% of the company’s third-quarter revenue. The app is a fantastic peer-to-peer payment solution that’s designed to allow consumers use their smartphones to pay for goods and services, make direct deposits, transfer money to friends and family, and much more.
Dolev said one of the main reasons he is bullish on the San Francisco, Calif.-based mobile payment company is Cash App’s expansion into regions that have previously been dominated by Paypal’s (PYPL) social payments service app Venmo. In fact, Dolev’s recent analysis of Google search trends found that since April of this year Cash App has achieved a 60% share of such app searches in the top 15 most populous states.
In addition, Dolev is upbeat about Square’s strategy to diversify the monetizing model of Cash App. Previously, the main driver of Cash App profits was its Instant Deposit feature which accounted for nearly 80% of Cash App gross profit in 2018. Dolev estimates that percentage was down to just 54% in the third-quarter of 2020, as Square saw increased growth for things like its Cash Card debit card, Cash App business platform and Bitcoin (BTC) revenue.
Finally, Cash App is becoming more profitable over time as new customers adopt revenue-generating features. In 2018, Cash App added about 8 million active users, which generated an estimated gross profit of $8 per user. In 2019, the estimated gross profit per user jumped 175% to $22.
Looking ahead, Dolev predicts Cash App’s active users reaching 65 million by 2023 and generating an estimated gross profit of $75 per user.
SQ Price Action
As of writing, Square shares are up $6.88, or 3.70%, to $192.73. The $87 billion market cap company trades at 147 times forward 12-month EPS estimates. Trailing-12 P/E prints above 265 times. Square’s 52-week range is $32.33 – $201.33.