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Bull of the Day: Square (SQ)

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In early July, I profiled Square ((SQ - Free Report) ) as the Bear of the Day -- even though I was still very bullish on this "Apple of Fintech" disruptor -- because analyst EPS revisions had dropped the stock into the cellar of the Zacks Rank.

Here's what I wrote then...

Square is a mad genius-level disruptive technology platform that just launched over 100% in Q2 because so many valuation-focused sell-side analysts and short-sighted hedge funds kept it below $75 for so long.

And as of July 9, the stock just tagged the moon above $133, for over 25% gains this month alone. Apparently (some of) the blind have begun to see.

Meanwhile, UBS and BofA offered downgrades to "Sell" and "Underperform" in May after the company's latest quarterly report when shares had just gotten back above $70.

And I think yesterday, a Cowen analyst made a much more timely downgrade after SQ's "200% rally" from the Coronavirus Crash lows. Lowering their rating to Market Perform from Outperform, they also thought they should raise their price target from $79 to something a little more respectable like $119.

(end of July 10 article excerpt)

I spent the rest of that article describing what most analysts were missing, how I stupidly listened to them, and what two other geniuses saw clearly. If I had only listened more closely to Jamie Dimon, who runs a little bank you've probably heard of, and Dan Dolev, then the Square analyst at Nomura Instinet, I would be sitting on over 200% gains in SQ shares this year. More on their views coming up.

And yet not a week after this detailed bullish case I laid out, Square was initiated with a Neutral rating and $133 price target at Goldman Sachs. Analyst Matthew O'Neill started 15 companies in the Payments & IT Services space, favoring enterprises with "strong secular growth trends" and those with the opportunity for total addressable market expansion.

O'Neill noted that COVID-19 will accelerate greater adoption of contactless payments and e-commerce, benefiting the networks, acquirers and processors. But he believed that "consensus Cash App enthusiasm" could prove too optimistic in the near-term to justify further appreciation for the already-rich valuation of Square shares.

June Quarter Knocks Their Socks Off

In early August, Square delivered a coronavirus report that was anything but recessionary. Sales and profits surged as online business activity offset the loss of in-person transactions for which the eponymous dongle became famous. Net revenue for the quarter was $1.92 billion vs the consensus of $1.14 billion -- for a unheard of 69% beat -- and adjusted EPS was +18 cents vs the Zacks Consensus of -7 cents, for a 350% beat.

There was a big bullish response from RBC Capital analyst Daniel Perlin, who raised the firm's price target on Square to $200 from $119 after the company reported implied adjusted net revenue of $677M, which was up 20% year-over-year and beat both his and consensus forecasts. He increased his revenue and earnings estimates following the "very impressive" Q2, which he sees illustrating the company's innovation, speed, and ability to pivot quickly, Perlin told investors.

Dan Dolev is Back!

Many analysts followed Perlin's lead in August, with average price target bumps up toward $170. But I was wondering why I hadn't heard from the biggest SQ bull of them all, Dan Dolev, and his proprietary "Cash App vs Venmo" tracker that he has used for years to chart Square's competitive stance vs. PayPal ((PYPL - Free Report) ).

Turns out Dan was in a transition to another big Japanese i-bank. Here was his debut on August 26...

Mizuho starts Square with Buy rating and $225 price target: Analyst Dan Dolev initiated coverage of Square reiterating his long-held belief that the fintech disruptor is best positioned to benefit from the dislocation in small- to mid-sized businesses. Citing that the "superior" unit economics for its Cash App could help drive four-times growth in gross profit, Dolev noted that Square's margins are "understated" as it seeks to maximize its terminal value.

Then in late September, Dolev put out a note saying that Square's Cash App is "virtually unstoppable." After meeting with Square management, Dolev restated his case for Cash App's total addressable market, average revenue per user potential, user growth prospects, and revenue sustainability. The SQ fortune teller said that Cash App's average revenue per user has seen "stellar growth," rising from nothing to $45 in just five years. And he estimated that this number can reach $80 or higher by 2023.

Cash is Dead, Long Live Cash App

Also in September, Daren Fonda writing for Barron's observed that cash usage was already at an all-time low at the start of the new decade and COVID-19 just hastened the decline, with Americans stuck at home and now still wary of the close proximity required for the physical exchange of potentially infectious bills. While Fonda noted PYPL and SQ valuations were pushing to extremes, he for long-term investors that there was still time to jump in.

I agreed in my recent Zacks Confidential report Demographics and Economics: A Strong Case for the Roaring 20s Bull Market where I made SQ one of my top 3 picks for the decade of virtual, remote, and digital disruption. To see my full thesis and the other picks, just email and tell 'em Cooker sent you.

Wall Street analysts agree as well with estimates rising sharply since the August earnings report. Revenue consensus for this year now sits at 49% growth to breach $7 billion and a 27% advance is projected for next year's top line to hit nearly $9 billion.

For earnings estimates, even though the consensus sits at just 53 cents, for a 35% decline, that's up from the Armageddon scenario forecast over two months ago at just 18 cents EPS. And next year's target is up to $1.15, representing over 120% growth.

These rising estimates are why SQ is a Zacks #1 Rank again.

Dimon: Square Innovated Where We Should Have

As for Jamie Dimon, I can only share and still enjoy these quotes of his from a February 2019 article in American Banker by Andy Peters...

“They came up with this little dongle to process stuff and it was a great idea,” Dimon said.

Square then built off the success of its card-reader to provide other services to its business customers, such as wider variety of point-of-sale systems that allow merchants to accept cash or card payments. It also provides merchants with tablets and software that allows them to track sales patterns, inventory and other important data.

“We didn’t give them that opportunity, Square did," Dimon said. Finally, Dimon lamented that Square beat JPMorgan to the punch in making online loans to small businesses.

Square Capital, its online lending arm, began offering business loans in early 2014 — nearly two years before JPMorgan began making its own digital small-business loans via a partnership with fintech lender OnDeck Capital.

Square "said, 'you know what, since we know this company and they might need an advance this time of the year, we might advance them $10,000 or $15,000 or $100,000,'” Dimon said. “They did all this stuff we could have done that we didn’t do.”

The mark of a great leader is to recognize and admit failures, and hopefully learn from them. I wonder if Jamie thought about trying to buy SQ when it was on sale last spring at $25 billion.

I sure wish I had hung to my shares. And let's hope I've learned my lesson about sticking with disruptive innovation.

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