As if they hadn’t been performing well enough this year already, shares of mobile payment company Square (NYSE:SQ) have been on a fresh rally to all-time highs since reporting Q3 earnings a month ago. They had already rode the wave of this past summer’s hype around all things tech and were up nearly 500% from March through October. A little dip into November’s earnings now looks to have been nothing more than an ideal buying opportunity for any investors who missed out on the previous run. But for those of us still on the sidelines, there’s plenty of reasons to think that come the middle of 2021, we’ll be wishing we got in back in December 2020.
The stock has been a firm favorite with fintech bulls, who’ve seen how the coronavirus pandemic has changed shopper’s habits, potentially forever. If nothing else, it has accelerated massive shifts that were otherwise going to be years in the making. Initially known for their point-of-sale technology that became a must-have for any independent small business, Square’s management’s more recent innovations and pivots into things like peer-to-peer money sharing have paid dividends.
Smashed Analyst Expectations
Indeed, the 100% beat on EPS estimates and 50% beat on revenue estimates that the company delivered last month was in large part due to the success of Square’s Cash App service. There has since followed a wave of price target increases from Wall Street as the sell-side firms have raced to readjust their models in the face of such a positive surprise. And herein lies the upside potential that should have investors still on the sidelines licking their chops.
Only last week, Evercore increased their price target on Square shares by 86% as they moved it up to $300 while also upgrading shares to Outperform. From Friday’s closing price, that suggests upside of more than 40%. The team acknowledged that they missed the recent move higher but this "extraordinary growth" is set to continue, driven by Cash App, continued innovation, and market expansion. Evercore also raised price targets for fellow fintech names like PayPal Holdings Inc (NASDAQ:PYPL) as the industry continues to feed off its own momentum.
It was the company’s promising Cash App that also had Mizuho coming out with a price target of $300 in the last week of November. Analyst Dan Dolev sees its user numbers more than doubling over the next two years as it continues to eat into Paypal’s Venmo market share.
While the Cash App service is doing phenomenally well, investors will be pleased to see that the company’s traditional Seller product revenue stream is also making a strong comeback. Considering how exposed and vulnerable small businesses were to COVID-19, it’s remarkable that a company like Square that started off with a small business product has been able to report the figures that it has. With hopes continuing to increase that a COVID vaccine will be available in the new year, the recovery potential in small businesses is also underlying the upside potential in Square stock for 2021.
Recovery Play Potential
BTIG leaned on this when they upgraded shares from Neutral to a Buy last month, while noting the massive $800 million marketing and sales investment the company is making for the holiday season. You can be sure few small business focused tech companies are as well prepared to capitalize on a full reopening as Square are.
So for those of us who missed out on the rally of the past nine months, there are plenty of reasons to be excited about what Square shares might do over the course of the next nine months. They’ve managed to come through a pandemic stronger than ever, when at the outset many were thinking it could have been the undoing of them. For those of us who are long the economy over the next few years, Square is a stock you want to have in your portfolio.