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The Ratings Game: Square’s ‘dreaded Cash App deceleration’ is met by calls to keep the faith

Square Inc. shares declined 4% Friday after the payment-technology company posted a slowdown in its Cash App consumer-facing business, but many analysts saw plenty of opportunities for the company to build new momentum with its mobile wallet.

The company delivered $512 million in Cash App gross profit during the third quarter, compared with $546 million in the second quarter. The slowdown didn’t come as much surprise to analysts, who had already been anticipating waning momentum from federal stimulus payments as well as some cooling of bitcoin demand. Nonetheless, the Cash App’s trajectory was the subject of much interest following Square’s
SQ,
-4.07%

report.

Read: Square says bitcoin demand slowed in Q3 but picked back up in October; earnings weigh on stock

“[W]ith Cash App now driving the majority of Square’s valuation, the path forward for Cash App has significant implications for the stock,” wrote MoffettNathanson’s Lisa Ellis, even though she said it’s admittedly difficult to predict the track of a business that’s been helped by sharp “bursts of growth” over the years.

Ellis seemed upbeat about the Cash App’s prospects, noting that the company still has “a long runway” to grow users and the revenue it derives from them. A combination of growth in users and average revenue per user could help Square increase its Cash App gross profit at a 30% compound annual rate through fiscal 2025.

Ellis has a buy rating and $340 price target on Square’s stock.

Bernstein analyst Harshita Rawat began her note to clients by remarking that the “dreaded Cash App deceleration is here.” But she too saw ample growth levers, including Square’s recent expansion of the product to include parent-authorized teen users as well as the launch of Cash App Pay, which lets users make purchases at Square sellers using the mobile wallet.

That product launch “is the clearest indication yet of Square’s emerging two-sided network strategy and this is the product we will be watching most closely in 2022 in terms of traction, product innovation,” she wrote.

In general, Rawat likes that Square is increasingly embracing its two-sided nature and looking for ways to link the merchant and consumer businesses. The “rise of two-sided ecosystems” is among the “many powerful emerging trends” within the payments universe that Square plays into, in her view.

Rawat rates the stock at outperform with a $300 target price.

Wolfe Research analyst Darrin Peller argued that the results “should act as a clearing event as expectations for future Cash App gross profit estimates are re-calibrated.” He too expects that “new products can contribute upside,” and he kept his outperform rating and $315 target price on the stock.

Beyond the third quarter, Square “provided mixed October trends that imply Cash App 4Q [gross profit] dollars similar to 3Q, and we suspect most investors were expecting more meaningful sequential growth,” wrote Raymond James analyst John Davis, who has a market perform rating on the stock.

“All in, although there wasn’t a lot to like in the 3Q print and numbers are headed lower across the board, we will remain on the sidelines as we believe the primary focus for investors will continue to be on the Afterpay deal, which is still expected to close in 1Q22,” he wrote.

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