Square (SQ): One Analyst Finally Got off the Fence — but for What?

Will anything stand in the way of Square’s (SQ) ascent? The fintech disruptor has been on a turbocharged run up recently (up by 150% over the past 3 months) and despite the lofty valuation, the surge hasn’t encountered any significant pullbacks yet.

The latest rally was partially fueled by a slew of price target and rating upgrades from Street analysts. Among those backing the Square story was Rosenblatt analyst Kenneth Hill. Hill initially intended to downgrade Square’s rating, believing the extended share gains didn’t correlate with the company’s earnings. However, a deeper inspection resulted in a turnaround and Hill’s glowing review – in particular of Square’s Cash App – helped push shares to a new all-time high in Tuesday’s session.

But the reaction to the upgrade took Hill by surprise. Among the retorts were questions regarding its timing, especially considering Square’s outsized recent gains.

Offering an explanation, Hill said, “We still see a tremendous amount of room to run over the coming years and felt the upgrade was the best way to capture that sentiment. Others agreed with the call but are looking for a pullback in the market to knock down shares before getting engaged (providing some downside protection, in our view).”

Feedback also focused on more fundamental issues. Such as the Cash App’s high percentage of Instant Deposit revenue – currently estimated at more than 50%. These revenues are set to decline, as free instant transfers become more widely available. But Hill has a reply to this, as well.

“We highlighted the high Instant Deposit concentration within the Cash App ecosystem today, and made the case that Cash Card will become the primary revenue source for Cash App over time,” said the 5-star analyst.

Other pushbacks included “the health of Sellers in the current environment,” and consternation regarding that lofty valuation. Interestingly, though, few questioned what Hill calls “the crux of our upgrade.” Hill’s thesis, after all, was based on the premise that over the next five years, Cash App revenue could more than triple. But this estimate, Hill added, is one “we believe could prove conservative.”

Overall, Hill stays with his Buy rating and $121 price target. Guess what? Square has left that price target behind, and the figure now represents potential downside of 9%. (To watch Hill’s track record, click here)

Among Hill’s colleagues, Square has a Moderate Buy consensus rating, based on 11 Buy ratings, 12 Holds and 4 Sells. However, the average price target of $94.18 implies shares will drop by 29% in the months ahead. (See Square stock analysis on TipRanks)

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