5 Best Software Stocks To Buy According To Hedge Funds

4. Square, Inc. (NYSE:SQ)

Number of Hedge Fund Holders: 94    

Square, Inc. (NYSE:SQ) is a California-based company that markets payments technology solutions. It is placed fourth on our list of 12 best software stocks to buy according to hedge funds.

On October 6, investment advisory Baird maintained a Neutral rating on Square, Inc. (NYSE:SQ) stock with a price target of $250. David Koning, an analyst at the advisory, issued the ratings update. 

At the end of the second quarter of 2021, 94 hedge funds in the database of Insider Monkey held stakes worth $10 billion in Square, Inc. (NYSE:SQ), up from 92 the preceding quarter worth $9 billion.

In its Q1 2021 investor letter, RiverPark Funds, an asset management firm, highlighted a few stocks and Square, Inc. (NYSE:SQ)  was one of them. Here is what the fund said:

“We established a position in leading Financial Technology provider Square during the quarter. Through one integrated system, SQ is a hybrid of two businesses: its Seller Business (charging small and medium-sized businesses about 3% for transaction payment processing, plus other services such as instant funds access, and software for everything from customer engagement to payroll), and its Cash App (originally for person-to-person cash transfers and now a growing digital financial services provider for consumers).

The combined business has grown gross profit at a 37% CAGR over the past five years to $2.7 billion (due to pass through costs, gross profit is more reflective of top-line growth) and we believe that the company has an enormous long-term runway, as it has less than a 2% share of a more than $160 billion market. It is our view that the company’s Cash App (which has grown

from nothing in 2015 to $1.2 billion gross profit last year) has a particularly large opportunity with its powerful ecosystem of digital financial services including digital wallets, direct deposits, stock trading, bitcoin trading, and business and tax services, which are all relatively new. The vast majority of Cash App’s more than 36 million users are younger and, importantly, are willing to replace their bank and other financial services accounts with the app.

We estimate that the company can grow its gross profit more than 30% and EBITDA more than 50% annually for the foreseeable future, and while most of the company’s current profit is from its Seller Business, we believe most of Square’s future value will be from its Cash App business.”