Payments stocks Square and Fiserv are looking more attractive to Wall Street, while PayPal may be facing more pressure to maintain its exceptional growth.
Shares of Square (ticker: SQ) have surged 215% this year to around $197. The valuation looks steep, as Barron’s has noted. But the stock has defied skeptics, and Mizuho sees the shares gaining more than 50% over the next year. Analyst Dan Dolev raised his price target to $300 this week, largely on the strength of Square’s highly profitable and fast-growing Cash App.
“Like good wine—and in theory, marriage too—Cash App’s cohorts are improving over time,” Dolev writes, referring to Cash App’s active user base.
Dolev argues that Square is finding attractive new ways to monetize Cash App, which competes with PayPal’s (PYPL) Venmo and other peer-to-peer payment services. Square makes money off the app by charging fees for instant deposit, which accounted for 54% of the app’s gross profits in the third quarter, Dolev estimates. But that is down from 80% in 2018, reflecting faster growth in other areas, including a debit card, business payments, and trading of Bitcoin.
Dolev increased his gross profit estimates from the app from $2.8 billion in 2020 to $7.7 billion by 2023 as its user base jumps from 32 million to 66 million active users. Cash App is also gaining on Venmo in the 15 most populous states, based on Google searches, he adds. Cash App accounted for 60% of searches in key markets since April, up from 39% in 2018.
One caveat to all this is Bitcoin. Square acts as a broker for Bitcoin, buying the digital currency and selling it to customers, who store and trade it on Cash App. Square benefits when Bitcoin prices rise and volume increases. Bitcoin prices have more than doubled this year, including a surge of more than 80% since September. But if demand and pricing plummet, so too will Square’s gross profits.
One other headwind for Square’s stock is valuation: Shares trade at 174 times estimated 2021 earnings. PayPal trades at 42 times earnings. Adyen (ADYEY), a Dutch digital payments stock that is growing rapidly, trades at 121 times earnings, making Square perhaps the most richly valued.
Nonetheless, Dolev argues that the shares are undervalued, saying they’re worth $300 or 15 times 2023 sales. That would be more than double Square’s already steep price to sales of 7 times, which may be a stretch even for fans of high-growth stocks.
One payments stock that’s more of a value play is Fiserv (FISV). The company runs a “merchant acquiring” business for retailers, setting up and managing their payment systems, and it handles e-commerce and payment processing for banks. The stock is down 2% this year due to pressure on merchant acquiring as retail sales volume shifted further into online channels during the pandemic.
But that’s the opportunity, argues MoffettNathanson analyst Lisa Ellis. She upgraded Fiserv stock to a Buy with a $145 price target this week and raised her earnings estimates for 2021.
Why get bullish now? Fiserv’s earnings are holding up surprisingly well, she writes, expecting the company to post $4.44 a share this year and $5.44 in 2021, a gain of 23% The stock’s valuation looks appealing at 21 times estimated 2021 earnings, a slight discount to the S&P 500. And merchant acquiring is in a healthier competitive position, she argues, noting that Fiserv should maintain its market share and grow revenues 14% in 2021. Fiserv is making headway with small and midsize businesses with its Clover payments platform, and the company has a “strong international presence in high growth countries” such as Brazil and India.
Moffett expects the stock to earn a higher multiple as earnings and revenue growth reaccelerate, fueled partly by ongoing cost-savings from its big 2019 merger with First Data. Fiserv also has new CEO, Frank Bisignano, who is likely to push the company into new e-commerce areas. And more mergers are likely, Ellis argues, partly because Fiserv looks relatively under-leveraged. Acquisition targets include Worldline (WLN.FR) or Nexi (Nexi.IT) in Europe, she notes, along with PagSeguro Digital (PAGS) or StoneCo (STNE), both based in Brazil.
