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Square is making another bet on Bitcoin, confirming plans to develop a Bitcoin hardware wallet, according to a tweet by CEO Jack Dorsey.

Its another sign that Square (ticker: SQ) is turning into a proxy for Bitcoin. Square has already invested directly in Bitcoin for its balance sheet, and it has transformed its Cash App into a mobile Bitcoin wallet, processing $3.5 billion in Bitcoin transactions in the first quarter.

That hasnt been a positive this year, however, with Bitcoin prices in a slump. Indeed, Square stock is up just 9% in 2021, falling well behind its big rival in payments, PayPal Holdings (PYPL), which is ahead 27%, and the broader Nasdaq Composite index, up 13.5%.

The underperformance hasnt exactly made Square a value stocktrading at 113 times estimated 2022 earnings.

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But some analysts are raising their estimates and reiterating Buy ratings on the stock, arguing that other parts of the business are showing strength.

SQ shares appear to be increasingly trading with Bitcoin, but there is so much more to the story, wrote D.A. Davidson analyst Christopher Brendler in a note on Friday.

Brendler likes the stock on signs that revenues for Squares Seller app, used by businesses to process payments, should exceed consensus estimates in the second quarter. Analysts see payment volume on the app rising 64% year over year. While that sounds impressive, it would actually be a deceleration from the first quarters growth rate, he notes.

Growth should top consensus estimates due to building macro reopening tailwinds, Brendler writes. Square is also indicating strength in travel and services revenue, implying that Seller app revenues could come in ahead of consensus.

Bitcoin isnt likely to be a positive tailwind this quarter, with prices down nearly 50% from their peaks earlier in the year. But the impact should be negligible on Squares gross profits, amounting to a $19 million, or a 1.9% drag, Brendler writes.

He maintained a Buy on the stock and $275 price target.

MoffettNathansons Lisa Ellis also came out with a bullish note on Square on Friday. She reiterated a Buy and $300 target on the stock, raising her 2021 and 2022 earnings estimates to $1.61 and $2.05 a share, respectively.

Her rationale: A stronger-than-expected recovery in payment volumes as the economy gains momentum, along with improvements in Squares operating margins and the companys guidance on operating expenses.

As for Bitcoin, she doesnt see much impact on gross profit. Overall, she expects Bitcoin gross profit to come in at $274 million this year, or 6.4% of total gross profit of $4.3 billion.

Nonetheless, Squares correlation to Bitcoin may only intensify as the company develops hardware to store the digital token offline and other custody services. Square stock was ahead 1.6% on Friday to $239.64, rising with Bitcoins 2.2% gain over the last 24 hours.

Write to Daren Fonda at daren.fonda@barrons.com

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Bitcoin's Weakness Is Dragging Down Square Stock. It Might Be Time to Buy. - Barron's