Buy Square Stock, Analyst Says. Its Tidal Deal Will Make It a Music Business Player.
Square stock got a price target increase on Thursday.
Courtesy Square
Square may not be a music-streaming app just yet. But it’s inching into the music industry with plans to buy streaming service Tidal. And that is good enough for some analysts to get more bullish on the stock.
“We like Square ‘s (ticker: SQ) deal for Tidal,” Guggenheim’s Jeff Cantwell wrote in a note on Thursday, reiterating a Buy rating on the stock and bumping up his price target to $290 from $288. “Though it remains early days,” he added, “we believe adding Tidal can be significant for Square, given clear synergies between the two companies.”
Square said on March 4 that it plans to buy a majority stake in Tidal, a music streaming service co-owned by Jay-Z, for $297 million in cash and stock. Jay-Z is now set to join Square’s board.
The deal does look like a head-scratcher. Paying nearly $300 million for a small streaming service with an estimated 3 million subscribers didn’t look like a wise use of capital. As Cantwell notes, Tidal isn’t expected to have a material impact on Square’s revenue this year, expected to come in at $14.1 billion, according to consensus estimates.
But Cantwell expects Tidal to eventually add $110 million in incremental annual revenue to Square by expanding the payments app into the music/entertainment business.
While Tidal isn’t a big player in streaming, the app is popular with artists, partly because Tidal pays slightly higher royalties than other services. Tidal also promotes merchandise, concerts, videos, and other content, and could be used as a social media bridge between musicians and fans. Tidal’s co-owners include Beyoncé, Chris Martin, Rihanna, and Madonna, he notes. The “halo effect” of having Beyoncé on board, with her 169 million Instagram followers, could be substantial.
Moreover, music-streaming is an attractive growth business. Paid streaming revenue grew 14% year-over-year to $3.8 billion in the first half of 2020, he notes. The overall global music market is much larger, estimated at $20 billion for music content in 2019.
Cantwell sees Square becoming a platform for payments for music lessons, concerts, merchandise, and other revenue sources in the entertainment industry. Cash App now has 36 million monthly active users, “an engaged, tech-savvy community of consumers,” he writes, and it isn’t hard to imagine Square helping musicians earn more income. Square could also incentivize musicians to use its Cash and Seller apps, offering revenue bonuses per stream if they open accounts and use direct deposit.
Square CEO Jack Dorsey is also a fan of Bitcoin and other types of digital assets, including non-fungible tokens, or NFTs. Dorsey recently offered to sell his first tweet as an NFT, receiving a bid of $2.5 million. NFTs are rapidly gaining traction in the music/entertainment industry. “Long story short, we see opportunity for Square to advance its crypto aspirations along with Tidal,” Cantwell writes.
How much revenue this will all generate for Square isn’t so easily quantified, however. An additional $110 million annually may not move the needle much on Square’s income statement or its stock, which has been struggling of late.
Shares of Square were off 5% Thursday to $234 amid a selloff in tech, with the Nasdaq Composite index down 1.3%. Square stock is down 13% in the last month, versus a 3.8% decline for the Nasdaq. Investors may be losing appetite for high-multiple stocks like Square, which trades at 126 times estimated 2022 earnings.
At Cantwell’s price target of $290, the stock would trade at a multiple of 11 times estimated 2022 revenue—still quite pricey by market standards, even with Beyoncé and Jay-Z on board.
Write to Daren Fonda at [email protected]
