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Why Did Bank of America Turn Bullish on Square Stock?

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Square (NYSE:SQ) stock rose over 3.2% on January 7 after Bank of America analyst Jason Kupferberg upgraded the stock. Square stock closed the trading day on Tuesday at $64.59. Square stock was trading 22.4% below its 52-week high of $83.20 and 18.7% above its 52-week low of $54.41. At its January 7 closing price, Square’s market value stood at around $28 billion.

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Why did Square stock rise?

On Tuesday, Kupferberg upgraded Square stock to “buy” from a “neutral” rating, as reported by CNBC. The Bank of America analyst also raised Square’s 12-month price target to $75 from $70. The new target price is nearly 20% higher than Monday’s closing price of $62.57 per share. Meanwhile, Kupferberg expects Square stock to rally in 2020, after a sluggish performance in 2019, per CNBC.

According to MarketWatch, Kupferberg stated that there is “ample upside” to Square’s near-term earnings estimates. He also believes that the company has set up conservative guidance for 2020. During its Q3 earnings, Square gave its initial 2020 revenue guidance and predicted adjusted net revenue growth to be in the low 30% range for 2020.

Kupferberg expressed optimism about Square’s analyst day event, which is scheduled for March 18. He expects the payments company to “update longer-term financial targets” during its analyst day. Moreover, he sees an “attractive entry point” for investment in Square stock.

Square’s financial performance

Square stock underperformed most of its peers in 2019. While Square rose only 11.5% in 2019, its peers PayPal (NASDAQ:PYPL) and Shopify (NYSE:SHOP) returned around 28.6% and 187.2%, respectively.

The departure of Square CFO Sarah Friar in October 2018 made investors cautious about the company’s future. However, Square has recovered from the downturn it faced last year. Many analysts have turned bullish on Square stock, as the company gradually started gaining steam. CNBC host Jim Cramer also believes that the stock could rally in the near term.

On November 6, Square delivered better-than-expected third-quarter earnings and revenues. Square’s sales grew 44% YoY (year-over-year) in the third quarter, while its adjusted earnings rose over 90% YoY.

Square’s revenues are growing from higher gross payments volume (or GPV). Square’s GPVs grew over 25% YoY in the third quarter. We believe Square can generate strong GPVs in the second half of 2020, owing to its potential seller investments.

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Square’s peer-to-peer payment app, named Cash App, and Bitcoin deposits are also adding to the company’s revenues. Square allows its users to trade Bitcoin cryptocurrency on its Cash App platform. In Q3, Bitcoin contributed to 12% of the company’s total revenue. Excluding Bitcoin, Square’s Cash App revenues rose around 115% YoY in Q3. We believe that Cash App could provide long-term returns.

Growth projection

For 2019, Square predicts its earnings per share to be in the range of $0.76–$0.78. Earlier, the company had anticipated earnings guidance of $0.74–$0.78 per share.

Square also increased its total revenue guidance for 2019. Excluding the impact of its Caviar sale, Square expects its adjusted revenue for 2019 to grow to $2.095 billion–$2.105 billion. Its previous forecast was $2.06 billion–$2.09 billion.

Analysts anticipate its Q4 revenues to grow by 27.7% YoY. Wall Street analysts predict its 2019 revenues to increase by 41.2% YoY. However, its expected 2019 revenue growth is lower than 2018’s revenue growth of 61.4% YoY. Analysts expect its revenue growth rate to decline to 27.5% YoY in 2020.

Wall Street analysts expect Square’s earnings to grow 51.4% in Q4 2019. Analysts forecast earnings growth of 65.7% for 2019, down from 74.1% YoY in 2018. They anticipate its earnings growth rate to fall to 23.1% in 2020.

Analysts’ recommendations and target price on Square stock

Among the 39 analysts covering Square stock, 18 have “buy” ratings, unchanged from last month. Sixteen analysts have “hold” ratings on the stock, down from 17 analysts in the last month. Five analysts have “sell” ratings on the stock, unchanged from last month.

As of January 7, analysts gave SQ stock a 12-month average price target of $73.14. Based on that day’s closing price, this price target represents a potential upside of 13.2%.

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