Square (NYSE:SQ) could see a substantial bullish upshot from Bitcoin, and Nomura analyst Dan Dolev is taking his theory in stride, betting on a big spark to revenue and profits for the tech player’s first quarter.
With the mobile payments company poised to deliver first quarter earnings for 2018 come May 2nd, the analyst reiterates a Buy rating on SQ while slightly bumping up the price target from $64 to $65, which implies a 30% upside from current levels. (To watch Dolev’s track record, click here)
Dolev makes a confident case, asserting here’s “how Bitcoin could drive a beat in 1Q18:”
“Will Bitcoin reshape the future of payments as CEO Dorsey often argues, or is it a passing fad? In reality, SQ’s correlation with Bitcoin has been on a downward trend. Plus, the stock is now less correlated with Bitcoin than PYPL, the payment networks or GOOG. Regardless, we estimate that opening Square Cash for Bitcoin trading earlier this year could drive a sizable boost to revenue and profits, driving up to 10% potential upside to adj. EBITDA guidance. This can help offset rising investment costs required to broaden Square’s international presence,” writes the analyst.
In addition to lifting his 12-month target expectations, Dolev sets positive expectations in anticipation of the earnings show, calling for $300 million in revenue to beat the tail-end of SQ’s guide and $37 million in adjusted EBITDA to trounce the company’s own outlook.
Approaching the impact of Bitcoin trading fees and how this can generate “meaningful” upside to the Street’s expectations, the analyst first calculates from a “top down” method. Under this “conservative” model, Dolev spotlights 3% to 10% upside to Square’s adjusted EBITDA, where merely 2% to 6% of the roughly 8 million Square Cash app users trade Bitcoin. Revenue per user may circle $12 per year, and the analyst wagers SQ Cash may drive a surge of 1% to 3% in adjusted revenue with incremental margins of 35%.
Under the second “bottom-up” approach, the analyst spotlights 5% to 10% in upside to adjusted EBITDA at the midpoint of the guide. Here, Dolev multiplies average transactions per users of 0.71 by around 24,000 SQ Cash Bitcoin traders time the first quarter median ticket value of $6,000 to $7,000 at a forecasted fee of approximately 1%.
In a nutshell, “Either way, SQ’s fundamentals should keep improving,” Dolev surmises, predicting: “We expect fundamentals to continue to improve helped by SQ’s accelerating share gains and mix shift to large sellers. We continue to expect net yield to expand (from 1.05% in 1Q17 to 1.09%) helped by growing penetration of higher priced products more than offsetting mix shift to larger sellers.”
TipRanks showcases SQ as one that has drawn optimism mixed with caution when it comes to consensus opinion among sell-side analysts. Out of 25 analysts polled in the last 3 months, 15 are bullish on SQ stock, 8 remain sidelined, while 2 are bearish on the stock. With a slight return potential of 2%, the stock’s consensus target price stands at $50.16, revealing apprehension baked into analysts’ expectations.