Square Stock Is Undervalued Based on Its Cash App and Crypto Growth

4 months ago 41

Expect to spot Square (NYSE:SQ) nutrient fantabulous maturation connected May 6 erstwhile it releases its first-quarter net report. This is based connected the company’s erstwhile maturation rate, arsenic good arsenic the immense popularity of its Cash App. I fishy that SQ banal volition determination higher successful the days aft the net merchandise arsenic analysts leap connected committee the bandwagon.

Right now, analysts foresee revenue of $3.33 billion and net per stock (EPS) of 16 cents for Q1. This volition correspond year-over-year (YoY) maturation of 141% erstwhile gross was $1.381 cardinal successful Q1 2020. EPS was 13 cents per stock past year, implying 23% YoY EPS growth.

Moreover, for each of 2021, analysts forecast gross of $14.1 billion, oregon 50.7% supra 2020 erstwhile gross was $9.5 billion. This puts SQ banal connected a guardant price-to-sales (P/S) of 7.37 times.

Growth Drivers for SQ Stock

What is driving this growth? The Cash App, Square’s user peer-to-peer app which present adjacent has brokerage ability, is producing a increasing information of its profits.

For example, successful Q4 2020, the Cash App produced $377 cardinal successful gross profits, up 180% YoY. This besides represented 46.9% of its $804 cardinal full gross profits. It was astatine a akin level, 48.5%, successful the anterior quarter.

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By contrast, the seller broadside (from merchants) gross profits grew conscionable 12% compared to 180% by Cash App. Therefore, I fishy that the Cash App could transverse implicit 50% of full gross profits successful Q1 and during 2021.

Another maturation driver, according to Seeking Alpha, is apt the government’s March stimulus payments. Much of this could person been spent oregon transferred peer-to-peer connected Cash App, including brokerage and crypto purchases.

PayPal (NASDAQ:PYPL) trades astatine 11.4 times 2021 gross and 9.45 times 2022 sales. This is importantly higher than Square’s 7.37 aggregate for 2021 and 6.22 times for 2022 sales.

If SQ banal were to beryllium valued astatine 9.45 times its forecast $16.93 cardinal successful 2022 sales, its marketplace worth should beryllium $160 billion. This represents a 44.2% imaginable summation implicit its $110.96 cardinal marketplace cap. That implies that SQ banal has a people terms of $333.38 per share.

Crypto Purchases

Finally, it volition beryllium absorbing to spot however overmuch Square has enactment successful cryptocurrencies arsenic of the extremity of March. The shareholder missive for Q4 said that the institution invested $50 cardinal successful Bitcoin (CCC:BTC-USD). It bought 4,709 Bitcoin tokens.

Then connected Feb. 23, Square said it had bought $170 cardinal much Bitcoin. It bought 3,318 Bitcoin tokens and present had 8,028 Bitcoin. At the time, this $220 cardinal concern represented 5% of its currency and securities.

But astatine today’s terms of $54,164, this represents $434.774 million. If the institution has not made immoderate much purchases, this could beryllium higher than 5% of its full currency and securities.

What Analysts Say

TipRanks.com indicates that 31 analysts person written reports connected Square successful the past 3 months and person an mean people terms of $283.71. This represents a potential upside of 22% implicit the terms connected May 4 of $231.19. This is inactive little than my people terms of $333.38, but is higher than different sites.

For example, Yahoo Finance says that 42 analysts person an mean target of conscionable $271.26. That is conscionable 17.3% implicit today’s price.

So I fishy that if Cash App profits astonishment connected the upside, a bully fig of analysts volition rise their terms targets for SQ stock.

What to Do With SQ Stock

A buying accidental could perchance unfastened up with SQ banal by falling aft its net merchandise connected May 6. If this happens, instrumentality vantage of it arsenic SQ banal is simply a bully concern for the agelong run.

As I person shown, it is selling beneath its large rival PayPal successful presumption of valuation, and besides has bully maturation prospects. Moreover, analysts mostly similar the banal and person higher terms targets than its existent price, which could emergence aft the net release.

On the day of publication, Mark R. Hake held a agelong presumption successful Square and Bitcoin.

Mark Hake writes astir idiosyncratic concern connected mrhake.medium.com and runs the Total Yield Value Guide which you tin review here.

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