The boost Square received from Covid-19 stimulus payments is fading.
Courtesy Square
Square may not grow as quickly as expected this year, according to one analyst, who cut his target for the stock price from $315 to $300 on Friday.
Susquehanna’s James Friedman maintained a positive rating on the highflying payments app, but he said that after meeting with management, he isn’t convinced that Square ‘s (ticker: SQ) growth initiatives will pay off in the near term.
Comparisons with 2020 are getting tougher as factors that lifted the stock last year begin to fade. Square got a boost in 2020 as consumer received stimulus payments through its Cash App and debit card, but that won’t last much longer as the final round of distributions tapers off.
Square is rapidly expanding services, including for Bitcoin, stock trading, a Cash debit card, and a new music service, Tidal. It is also making headway in its Cash for Business segment, offering payments services to businesses and collecting a standard 2.75% fee on transactions.
But those initiatives, while driving user engagement and payment volume, may take a while to result in sharply higher profits. And Square has reiterated that it is far more focused on increasing engagement and the flow of payments through its system than it is on earnings before interest, taxes, depreciation, and amortization, or Ebitda.
“Out perception is Square continues to do very well,” Friedman writes. But “given the tougher comp …and the ephemeral nature of stimulus, our earliergrowth assumptions may have been too aggressive.”
Friedman trimmed his gross-profit estimate for 2021 to $4.3 billion, from $4.7 billion. He also reduced his calls for 2022 and 2023, expecting $5.9 billion and $8 billion, respectively.
One wild card is Bitcoin. Square customers can buy, sell, and store the cryptocurrency on its Cash App. But while Bitcoin contributes a large chunk of Square’s revenues, it generates very little profit since the company acts as a broker, collecting fees and a spread on the currency exchange. Square CEO Jack Dorsey has also bought Bitcoin for the company’s balance sheet.
Forecasting Bitcoin’s price and related revenues is like peering into a murky hole. The cryptocurrency was at $36,800 on Friday, down from around $65,000 earlier this year but up from its low point near $30,000.
Bitcoin is also getting caught in geopolitical, environmental, legal, and regulatory controversies. While El Salvador’s president recently announced that Bitcoin would become legal tender, making that country the first to approve it as a currency, the digital coin faces a growing government backlash.
Square stock, meanwhile, has been in a rut. It is up 8.5% this year, trailing behind the S&P 500 ‘s 12.4% gain and the 9.3% rise in the Nasdaq Composite index. It has also fallen behind its bigger payments rival, PayPal Holdings (PYPL), which is up 18.8% this year.
Wall Street is bullish on the stock overall, with an average price target of $280, according to FactSet. But it isn’t easy to value the shares because Square’s revenues are inflated by Bitcoin and the company isn’t expected to generate significant earnings, or Ebitda, for years.
Square is one of the more controversial tech names. While its average stock rating is a buy, several brokerages rate it at neutral or hold, including Compass Point Research, William Blair, Jefferies, Wedbush, and Wells Fargo.
Write to Daren Fonda at [email protected]
