Cash App's Surge During Covid-19 Pandemic Fuels Square Stock
02 9월 2020 - 6:59PM
Dow Jones News
By Peter Rudegeair
Square Inc.'s Cash App looks a lot like a bank--digitally
storing and transferring money for users. Investors don't seem to
mind.
Square shares have rallied 28% in the past month and are up 166%
since the start of the year, while bank stocks have fallen sharply.
The run-up is mostly due to the popularity of its Cash App
offering, which lets consumers send money to one another via
smartphone, purchase things with a prepaid debit card and invest in
bitcoin and slices of individual stocks, analysts and investors
said.
Those businesses took off during the coronavirus pandemic. Cash
App revenue more than doubled to $325 million, excluding sales of
bitcoin, in the second quarter from a year earlier. Thanks in part
to Square's making it easy for individuals to accept their stimulus
checks and unemployment benefits in Cash App, the amount of money
stored there reached $1.7 billion in the second quarter, 3 1/2
times more than in the same period last year. Monthly active users
topped 30 million in June. Square shares closed at $166.66 Tuesday,
up from $61.84 a year ago.
Stock analysts at Bernstein Research estimate that investors are
currently pegging Cash App's value at as much as $40 billion, or
more than half of Square's overall market capitalization. At that
valuation, Cash App is worth more than Capital One Financial Corp.,
First Republic Bank and all but roughly a dozen U.S. banks.
"One has to be a bull on Cash App to be a bull on the stock,"
Bernstein analyst Harshita Rawat said in a July presentation.
"Almost all of the stock performance has been driven by the Cash
App."
Investors have shunned bank stocks in recent months, betting
that ultralow interest rates and the prospect of widespread
defaults on credit cards, commercial mortgages and other loans
would erode their profits. The KBW Nasdaq Bank Index of 24 large
lenders is down 32% since the start of the year.
Square also fell out of favor among investors earlier this year
when foot traffic to the small businesses for which it processes
payments cratered due to stay-at-home orders and business
shutdowns. Its stock declined more than 50% over the course of
three weeks in March, and though the shares have more than
recovered, many of Square's small-business customers haven't. The
volume of payments it processed for its merchants fell 15% to $22.8
billion in the second quarter.
Cash App isn't reliant on lending or in-store payments. Analysts
estimate its biggest source of revenue comes from a 1.5% fee it
charges users who want to transfer funds out of their accounts
instantly. Cash App also earns a fee when users make a purchase
with the prepaid debit card that is linked to their accounts,
transactions that Square encouraged during the pandemic by offering
discounts when people used popular services like DoorDash Inc.
"They've executed phenomenally on increasing the relevance of
Cash App as an alternative banking service," said Anthony Zackery,
a portfolio manager at Zevenbergen Capital Investments LLC, which
holds more than 700,000 shares of Square across the funds and
accounts it manages. "If consumers and Cash App users get on the
system and like what they see, I don't think they're going to close
down their Cash App accounts and go back to legacy, old-school ways
of banking."
Square has also recruited hip-hop artists, one of Cash App's
most devoted fan bases, to help bring aboard new users during the
pandemic. To promote Cash App and their new single, "WAP," rappers
Cardi B and Megan Thee Stallion gave away $1 million to fans who
messaged them on Twitter with their Cash App usernames, called
"cashtags."
Cash App's popularity notwithstanding, Square's valuation is
much more stretched than those of most other U.S. stocks. It trades
at a whopping multiple of 174 times its expected earnings over the
next 12 months, compared with the S&P 500 index's forward
price/earnings ratio of about 23, according to FactSet. Square lost
roughly $117 million in the first six months of 2020, yet its
overall market capitalization exceeds that of Goldman Sachs Group
Inc.
"If you look at the owners, a lot of those disruptive
growth-type investors are the ones that have been attracted to the
story," said Josh Beck, an analyst at KeyBanc Capital Markets. "You
have to think of this more like you'd think of Facebook or LinkedIn
where there's a big virality."
Other analysts caution that there are risks Cash App won't be
able to keep its current growth going. The boost it got from
stimulus checks could be fleeting. The 1.5% fee Cash App charges
for instant transfers could come under scrutiny for resembling
payday loans, as could its arrangements with smaller banks to offer
the services Square can't offer itself because it lacks a
consumer-banking license, said Bernstein's Ms. Rawat in the July
investor presentation.
A spokeswoman for Square declined to comment.
"Right now Cash App is flying under the radar because Square is
serving an unmet need in the market," Ms. Rawat said. "But as they
grow bigger, that could change."
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
September 02, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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