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Why Square Stock Just Popped 5%

By Rich Smith – Updated Aug 20, 2020 at 2:11PM

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A German banker sees fast -- and accelerating -- growth rates for Square.

What happened

Shares of point-of-sale payments specialist Square (SQ -0.38%) are rolling higher in Thursday trading, up 4.9% as of 1:35 p.m. EDT after analysts at German investment bank Deutsche Bank hiked their price target on the $157 stock all the way to $180 -- a 28.5% increase over the banker's previous valuation.

So what

Deutsche Bank bases its new valuation on "significant potential near-term tailwinds" it sees supporting the stock now, followed by "sustainably higher long-term growth rates coming out of the pandemic" in the future. 

"The recent official breakout of the Seller and Consumer (Cash App) ecosystems as separate segments," says Deutsche Bank in a note covered by today, suggest that the 32% increase in gross profits that Square showed in the second quarter could soar as high as 53% growth in the third quarter -- and perhaps zoom as high as 61% in the fourth quarter.

And these growth rates won't slacken (much) thereafter. Across all of fiscal 2021, Deutsche Bank believes Square could grow its profits as much as another 55%.

Road stretches into the distance, marked 2020, 2021, 2022

Image source: Getty Images.

Now what

Where is all this growth coming from?

According to Deutsche Bank, Square's Cash App "has significantly outperformed during the current pandemic gaining new highly engaged customers to monetize and accelerate product adoption through cross-sell." Last quarter alone, Square added 30 million new users of the product -- 25% faster growth than it was seeing just six months prior. And overall, "the pandemic has positively driven an acceleration in the adoption of digital financial services [which should have] lasting positive effects on SQ's growth rates."

In short, this is more than just a one-off story of a stock benefiting from isolated trends in a pandemic. It's a long-term growth story for Square.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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