By Emily Bary
Stock gets an upgrade from Citi amid continued Cash App momentum and a recovery in the merchant business
A recovery in Square Inc.'s merchant business and continued momentum for the Cash App have analysts feeling increasingly upbeat about the company's prospects.
The payment processing company's third-quarter results Thursday afternoon were enough to earn the stock at least one upgrade, from Citi Research analyst Peter Christiansen.
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"We're now a believer that Square's (SQ) secular growth opportunity is too big to ignore... even from here," he wrote in a note to clients while boosting his rating to buy from neutral and raising his price target to $215 from $185.
Square shares are up more than 10% in morning trading and on track to close at a new all-time high.
Christiansen called Square's latest numbers part of a "conviction quarter" that showed the company is goring Cash App engagement, with the potential for an acceleration in user growth down the road as Square steps up marketing spending. "By the way... Seller is making a solid comeback!" Christiansen continued.
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Another optimistic view came from Susquehanna's James Friedman, who noted that the company is "playing offense" with its Cash App strategy.
"Seeing a window of perceived marketing efficiency, Square is going back to the offensive playbook originally intended pre-Covid. With an $800 million to $850 million campaign planned post-holidays across both Square Cash and Seller, look for a flurry of product development, sales and marketing across the two ecosystems," he wrote in a note to clients, while upping his price target to $215 from $195 and keeping a positive rating.
Guggenheim's Jeff Cantwell cheered Square's international momentum. "Seller international volumes were +46% year over year this quarter, and are now 11% of Seller [gross payment volume], up from 6% two years ago. This geographic diversification is positive for Square, and it also proves that the company's payment platform can be successful outside of its home market (the U.S.)," he wrote.
In addition, Cantwell likes that Square's past product introductions seem to be gaining more steam with time. "Adoption of the Square Card, for example, has increased each quarter since it was launched, and in 3Q more than $250 million was spent by Sellers using Square Card," he wrote, referring to a debit card for businesses that lets them instantly spend their money from sales.
Still, he remains neutral on the shares, arguing that they seem fully valued, and offered a suggestion for Chief Executive Jack Dorsey.
"We think SQ should build Cash App into a super app" similar to China's Alipay, he wrote. Alipay consolidates bill pay, loan access, purchases and more in one app.
"Open up Cash App's platform by launching more products and services that consumers want and will use," Dorsey said. "The way we see it, there are at least 30 million Cash App users in the U.S. who would probably like to see this happen -- and lots of others out there who would get behind the idea of a true super app here in the U.S."
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Wolfe Research analyst Darrin Peller was encouraged by improving performance for Square's seller business despite the pandemic.
"We believe 3Q reaffirmed that Square's ability to pivot (and more importantly help Sellers pivot) to alternative channels amid challenging macro circumstances is highly differentiated; and while acknowledging the current outperformance can be attributed to stimulus programs to an extent, we still believe current estimates have material upside, whether or not another round of stimulus comes to fruition," he wrote in a note to clients.
Peller is also upbeat about Square's momentum with its Cash App for Business offering, which allows small businesses to accept payments using the traditionally consumer-focused Cash App, while paying a fee to Square. "Notably, Cash App for Business, generated $2.9 billion of [gross payment volume (up 332% year over year) comprising 9% of consolidated GPV (versus 2% in 3Q19)," he wrote, while raising his price target to $205 from $195 and reiterating an outperform rating.
MoffettNathanson analyst Lisa Ellis sees big opportunity ahead for Square given that, during the third quarter, there was a 53% increase on a year over year basis in the number of applications for new businesses with planned wages.
"The pandemic may have crushed employment, but it has not crushed the entrepreneurial spirit," she wrote, and Square stands to benefit from this trend in her view as these new businesses seek out technology. Typically it can be hard to convince existing businesses to change up their technology, she argued, but Square has an advantage when it comes to new businesses.
Ellis has a buy rating and $210 price target on Square's stock.
At least 12 analysts hiked their price targets on Square shares after the report, according to FactSet. Of the 44 analysts tracked by FactSet who cover Square's stock, 21 have buy ratings, 18 have hold ratings, and five have sell ratings, with an average price target of $182.82.
Square's stock has rallied more than 200% so far this year as the S&P 500 has gained 8.4%.
-Emily Bary; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
November 06, 2020 11:33 ET (16:33 GMT)
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