Square (NYSE:SQ) is scheduled to report Q3 earnings on Thursday, November 5. Analysts will be carefully evaluating Square stock based on the outlook for its hugely popular Cash App. It’s likely a number of them will be looking to up their price targets for SQ stock.
That’s exactly what recently happened at both Wolfe Research and Oppenheimer. Seeking Alpha reports that at the end of September, Wolfe raised its target price on SQ stock from $160 to $195. This was largely due to gains in online market share and at point-of-sale (POS).
In addition, Oppenheimer analyst Jed Kelly upgraded his price target to $185 and to Outperform. He based this on the company’s two-sided networks of sellers and consumers making it a “structural winner.”
Looking Forward
Analysts expect the company will report 16 cents earnings per share (EPS) on $2.08 billion in revenue. Last quarter the company made 18 cents EPS on $1.92 billion in revenue. Earnings forecast for 2020 are 56 cents EPS for this year and $1.17 for next year.
Many have commented that this puts the Square stock on high valuation ratios. In fact, at today’s price, the 2020 price-earnings (P/E) ratio is 275 times and for 2021 it is 132 times earnings.
But as I wrote in my August article, Square stock is well on track to replicate the market capitalization of PayPal (NASDAQ:PYPL). My point at the time was that if Square’s Cash App continues its rise, SQ stock could rise over 400% over 4 or 5 years.
This assumes that the Cash App begins to overtake the company’s revenue and finances as I suspect it will. In Q2 Square said that its Cash App profits grew to $281 million. This is getting close to its Seller ecosystem gross profits of $316 million for the quarter.
Therefore, analysts will be looking to see if the Cash App profits in Q3 have made even further progress in overtaking the Seller-side profits. I suspect that this will be the case. In the end, this is what will drive Square’s market capitalization closer to PayPal’s.
For example, as of the end of October, Square had a market cap of $75.34 billion and PayPal has a $218.4 billion market value. Moreover, PayPal trades for 10.5 times this year’s revenue and 8.6 times next year’s sales. That’s similar to Square’s valuation. Square is at 9.3 times sales this year and 7.3 times next year’s sales.
What’s Next With Square Stock
My point is that Square isn’t that expensive when you compare it to PayPal. By the way, a number of companies are trying to emulate Square’s success with its Cash App. I consider that a sign of its success and also a potential benefit to Square as it acts to enlarge the market for Cash App.
For example, apparently, Visa (NYSE:V) has now got a digital phone payments app called Tap. In addition, JPMorgan Chase (NYSE:JPM) now has a product called QuickAccept. Both of these products let businesses take card payments through a mobile app or contactless card reader.
Even PayPal is trying to emulate Square’s Cash App with its new service that lets customers buy, hold, and sell cryptocurrency from their PayPal account.
Analysts are taking note. TipRanks.com reports that 24 analysts that wrote about Square stock in the past 3 months have a price target of $174.41. That represents a potential gain of 12.6% in the stock.
However, Marketbeat.com reports that 42 analysts have a consensus target of $129.00. This represents a downside of 16.7% for Square stock. Yahoo! Finance reports that 38 analysts have a price target of $165.77 per share. That is 7% above today’s price.
The majority of analysts believe that Square stock is still worth buying. Its upcoming November 5 earnings report may help them see how powerful the company’s Cash App has become.
On the date of publication, Mark R. Hake had a long position in Square stock.
Mark Hake runs the Total Yield Value Guide which you can review here.
