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Why Square Stock Popped 5% Today

By Rich Smith – Aug 27, 2020 at 3:55PM

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One analyst sees profits in Square's future -- but revenue growth first.

What happened

Shares of point-of-sale payments processor Square (SQ -7.30%) jumped more than 5% in early trading today, and as of 3:10 p.m. EDT, they're still holding onto about a 2.7% gain.

You can thank Mizuho Securities for that.

Man wearing suit supporting a rising stock arrow

Image source: Getty Images.

So what

This morning, Mizuho initiated coverage of Square stock with a buy rating and a $225 price target, promising as much as a 42% profit on shares that currently fetch just $158.

Although growing revenue quickly, Square is not a very profitable company currently. Its operating profit margin last year was a bare 0.6%, and it's turned negative since the coronavirus hit and the recession began. But as Mizuho argues in a note covered by, "superior" unit economics at Square's Cash App unit create the potential for the company to quadruple gross profits in that division.

Now what

Going forward, Mizuho forecasts huge gains in customers from a "tectonic" shift in how small and medium-sized businesses are operating in the pandemic. Moreover, the analyst sees users of the Cash App doubling from 30 million presently to 60 million by 2023 as Square continues to steal market share from incumbents.

Even if profits don't happen immediately, if Square can grow at the rates Mizuho projects for it, its stock could keep rising in tandem.

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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