Expect to see Square (NYSE:SQ) produce excellent growth on May 6 when it releases its first-quarter earnings report. This is based on the company’s previous growth rate, as well as the huge popularity of its Cash App. I suspect that SQ stock will move higher in the days after the earnings release as analysts jump on board the bandwagon.
Right now, analysts foresee revenue of $3.33 billion and earnings per share (EPS) of 16 cents for Q1. This will represent year-over-year (YoY) growth of 141% when revenue was $1.381 billion in Q1 2020. EPS was 13 cents per share last year, implying 23% YoY EPS growth.
Moreover, for all of 2021, analysts forecast revenue of $14.1 billion, or 50.7% above 2020 when revenue was $9.5 billion. This puts SQ stock on a forward price-to-sales (P/S) of 7.37 times.
Growth Drivers for SQ Stock
What is driving this growth? The Cash App, Square’s consumer peer-to-peer app which now even has brokerage ability, is producing a growing portion of its profits.
For example, in Q4 2020, the Cash App produced $377 million in gross profits, up 180% YoY. This also represented 46.9% of its $804 million total gross profits. It was at a similar level, 48.5%, in the prior quarter.
By contrast, the seller side (from merchants) gross profits grew just 12% compared to 180% by Cash App. Therefore, I suspect that the Cash App could cross over 50% of total gross profits in Q1 and during 2021.
Another growth driver, according to Seeking Alpha, is likely the government’s March stimulus payments. Much of this could have been spent or transferred peer-to-peer on Cash App, including brokerage and crypto purchases.
PayPal (NASDAQ:PYPL) trades at 11.4 times 2021 revenue and 9.45 times 2022 sales. This is significantly higher than Square’s 7.37 multiple for 2021 and 6.22 times for 2022 sales.
If SQ stock were to be valued at 9.45 times its forecast $16.93 billion in 2022 sales, its market value should be $160 billion. This represents a 44.2% potential gain over its $110.96 billion market cap. That implies that SQ stock has a target price of $333.38 per share.
Crypto Purchases
Finally, it will be interesting to see how much Square has put in cryptocurrencies as of the end of March. The shareholder letter for Q4 said that the company invested $50 million in Bitcoin (CCC:BTC-USD). It bought 4,709 Bitcoin tokens.
Then on Feb. 23, Square said it had bought $170 million more Bitcoin. It bought 3,318 Bitcoin tokens and now had 8,028 Bitcoin. At the time, this $220 million investment represented 5% of its cash and securities.
But at today’s price of $54,164, this represents $434.774 million. If the company has not made any more purchases, this could be higher than 5% of its total cash and securities.
What Analysts Say
TipRanks.com indicates that 31 analysts have written reports on Square in the last three months and have an average target price of $283.71. This represents a potential upside of 22% over the price on May 4 of $231.19. This is still lower than my target price of $333.38, but is higher than other sites.
For example, Yahoo Finance says that 42 analysts have an average target of just $271.26. That is just 17.3% over today’s price.
So I suspect that if Cash App profits surprise on the upside, a good number of analysts will raise their price targets for SQ stock.
What to Do With SQ Stock
A buying opportunity could potentially open up with SQ stock by falling after its earnings release on May 6. If this happens, take advantage of it as SQ stock is a good investment for the long run.
As I have shown, it is selling below its major competitor PayPal in terms of valuation, and also has good growth prospects. Moreover, analysts generally like the stock and have higher price targets than its current price, which could rise after the earnings release.
On the date of publication, Mark R. Hake held a long position in Square and Bitcoin.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
