Can Cash App keep driving Square’s share price higher?

Square's [SQ] share price has had a phenomenal 2020. Up 266% this year to 21 December, the stock has enjoyed a monumental rally thanks to the success of Cash App, Square’s mobile payment service. The enthusiasm amongst investors has been enough to see Square’s share price trading well above both its 50-day and 200-day moving averages. 

Yet, the direction hasn’t always been one way. Mid-October saw some volatility in Square’s share price, falling from $190.67 on 13 October to $154.88 on the last day of the month, despite the stellar third quarter results released during that period. 

That said, Square's share price has rallied over 50% since, matching rival PayPal [PYPL] and outpacing the wider Nasdaq's 5.8% gains.

With 2021 around the corner, can Square’s share price keep gaining, or is a correction inevitable?

What's behind Square's share price rally?

The end of November saw Square and PayPal both emerge as huge players in the crypto-currency market, paving the way for millions to trade bitcoin. Hedge fund Pantera Capital estimates that Square clients trading bitcoin through Cash App’s brokerage feature has accounted for 40% of bitcoin that hit the market since the release of the app two years ago.

Brian Kelly, founder and CEO of BKCM told CNBC that the mainstream nature of Square's Cash App and PayPal is making it easier for first time traders to buy up bitcoin.

“It’s now easier to buy and transact with, and it’s opening up new demand by taking down a barrier to entry,” Kelly said.

"It’s now easier to buy and transact with, and it’s opening up new demand by taking down a barrier to entry" - Brian Kelly, founder and CEO of BKCM

Since launching, more than 2.5 million customers have used Cash App to buy assets and billions of dollars have been traded. In Square’s latest earnings report, the brokerage product was the fastest growing feature of the app, while those using it conducted 28% more transactions across the platform and generated 15% more gross profit.

Dan Dolev of Mizuho said that the brokerage product “can also be Robinhood,” a reference to the wildly popular trading app. If that proves the case, then the Cash App could continue to see strong growth in 2021, benefiting both Square’s share price and its bottom line.

Why should investors care about Square’s share price?

Square crushed Wall Street expectations for third-quarter earnings in November. In the results, net revenue came in at $3.03bn, a 140% increase from the same period last year. Earnings came in at $0.34, more than double what analysts had been predicting.

Profits from Cash App more than tripled its gross profits in the quarter year-on-year, making up almost half of Square’s overall gross profit. That beat led to several analysts upping their 12-month price targets for Square. However, while Square noted that October had seen “strong revenue and gross profit” year-on-year for Cash App, it recognised that “growth may not sustain at the same levels during the remainder of the fourth quarter” — something to watch out for in fourth quarter results. 

Along with delivering earning beats, Square has been busy continuing to expand its client base beyond small and medium sized businesses. The company recently announced a partnership with POWDR ski resort, which would allow visitors to use Square or Cash App as a payment method at luxury ski resorts throughout Canada and the United States. POWDR will also use Square Point of Sale to process transactions, along with Square’s restaurant and retail solutions. 

“With Square’s proven success with sports stadiums and entertainment venues, bringing our solutions to ski resorts is a natural extension in serving larger, more dynamic businesses,” said Ashley Grech, Global Head of Sales at Square.

"With Square’s proven success with sports stadiums and entertainment venues, bringing our solutions to ski resorts is a natural extension" - Ashley Grech, Global Head of Sales at Square

Where next for Square’s share price?

Wall Street is divided on Square's outlook for the next 12 months. Seaport Global initiated coverage on Square in December with a Buy rating and a $250 price target, which would see a 7.1% upside on 21 December’s close. This month also saw Evercore ISI Rayna Kumar hike his price target on Square from $161 to $300, a 28.5% upside on the current share price.

Kumar believes that Square's CashApp will have a 36% compound rate in adjusted revenue growth over the next three years as its network continues to "grow aggressively with expanded paths to monetization over time.”

Other analysts tracking Square's share price are less optimistic, with the stock commanding a $227.08 average price target on Yahoo Finance — a 2.7% downside on the current price. The stock also trades at an expensive 210.22X forward price to earnings multiple. Traders will need to decide for themselves if Square can sustain the pace in 2021, or if it’s due a pullback.  

Square's share price vitals, Yahoo Finance, 23 December 2020