The Ratings Game: Square earnings net stock an upgrade as analyst sees huge market for Cash App

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Square Inc. shares are up 5% in Thursday trading after the company topped earnings expectations, shrugged off coronavirus concerns, and gave new information about the growth of its popular Cash App.

The increasing use of various Cash App features like investing and card purchases is fueling excitement around Square’s SQ, +6.15%  business, helping net the payments platform stock an upgrade from Canaccord Genuity’s Joseph Vafi after the report. He sees potential for Cash App to become a “real consumer banking platform” and argues that the total market for this consumer portion of the business could eventually be larger than the market for Square’s seller services.

See more: Square gives upbeat earnings forecast, says Cash App totaled 24 million users in December

Cash App began as a peer-to-peer payments platform, but the company has been adding new features to the ecosystem, including the ability to conduct equity trading in the app. Square disclosed that the app had 24 million active users in December, up 60% from a year ago.

“Importantly, we believe the P2P aspect of Cash App is a real Trojan horse in reducing customer-acquisition cost, enabling viral growth in users at a fraction of traditional sales approaches,” Vafi wrote. He’s excited about potential monetization opportunities in direct deposits, which is “still virtually all on the come at this point.”

Vafi raised his rating on the stock to buy from hold and increased his price target to $90 from $64.

Macquarie analyst Dan Dolev noted that Square may face less of an impact from the spread of the coronavirus from China than other payments companies, owing to the company’s more focused business model. Square generates nearly all of its revenue from the U.S. and is “under-indexed” to tourism, he said, while weak cross-border travel has been a source of concern for other more globally oriented companies.

“This likely helped Square have confidence to provide an upbeat 2020 revenue & [gross profit] guidance,” Dolev wrote. “In fact, management noted it did not see, nor does it expect, any material impact from the coronavirus. We expect a very positive stock reaction, especially given the global fears that have plagued the stock market thus far this week.”

He rates the stock at outperform with a $105 target.

Square’s report came a few days after Mastercard Inc. lowered its quarterly forecast as a result of the coronavirus epidemic. PayPal Holdings Inc. disclosed Thursday morning that it expects a negative revenue impact of 1 percentage point due to the outbreak.

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The latest results and commentary weren’t enough to sway Instinet analyst Bill Carcache, however, as he kept his “reduce” rating and $49 price target on the stock.

In Carcache’s view, Square is becoming less efficient with its marketing spending. “While Square expects these investments will begin to contribute to revenues towards the end of 2020, we remain cautious on the sustainability of growth longer term as investment spending slows,” he wrote.

At least 15 analysts raised their target prices on Square’s stock following the report, according to a FactSet count. Of the 41 analysts tracked by FactSet who cover Square’s stock, 20 have buy ratings, 15 have hold ratings, and six have sell ratings. The average price target listed is $81.51, roughly 1% above recent levels.

Shares have added about 27% on the year, as the S&P 500 SPX, -2.23%  has dropped roughly 5%.

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