Square
The debate over Square Inc. rages on following the company’s latest quarterly earnings report.
Square shares fell after the company delivered its first-quarter numbers on Wednesday, though the payment processor raised its revenue and earnings forecasts for the full year. Afterwards, analysts weighed in on what caused the stock to drop and whether those factors were indeed reason for concern.
BTIG analyst Mark Palmer, a rare Square bear, saw a few reasons for Thursday’s selloff. The first, a Bloomberg report that Amazon.com Inc. was giving businesses discounts to accept Amazon Pay, had nothing to do with earnings. Otherwise, he thinks investors might also be disappointed that the company’s current-quarter earnings outlook came in below consensus estimates, or just that investors have much higher standards for Square now that its stock has appreciated so much.
Another theory, according to Palmer, is that Wall Street didn’t like the look it got at Square’s bitcoin financials. Square said it generated $34.1 million in bitcoin revenue during the quarter and incurred $33.9 million in bitcoin costs. “While we acknowledge that Square had only two months of contribution from bitcoin after the full launch of the effort, we also believe the initial figures demonstrated just how dramatic a ramp in bitcoin volumes would be required before the initiative would contribute in a meaningful way to the company’s operating performance,” Palmer wrote.
He reiterated his sell rating and $30 price target.
CFRA’s Scott Kessler joined Palmer in the bear camp Thursday, downgrading his rating to sell from hold. Kessler had slightly different concerns about bitcoin and also flagged the company’s recently announced acquisition of Weebly as potentially risky.
“Without bitcoin revenues, net and adjusted revenues would have increased 37% and around 50%,” Kessler wrote. “We think Square is overvalued.”
Square’s planned investment spending for the rest of the year is likely a reason why the company’s second-quarter outlook fell short of expectations, but some analysts found reason to be optimistic about the company’s investment aims. Square executives reiterated Wednesday that their top investment priorities include omnichannel improvements, financial services and international expansion.
“We think bears may latch on to tempered margin outlook as Square ramps investment into new growth initiatives, but we see these investments as ultimately driving better long-term growth opportunity,” wrote Morgan Stanley’s James Faucette, who has an equal-weight rating on the stock.
He highlighted the company’s subscription and services segment, which nearly doubled year-over-year despite what Faucette called tough comparisons. “Instant Deposit remains the star performer with benefit from both seller volumes as well as Cash App. Caviar and Square Capital also remain key contributors with healthy growth in both,” he wrote.
Mizuho’s Thomas McCrohan also saw benefits to the spending. “Investing in products that drive profitable growth is in shareholders’ best interest as it is resulting in a positive mix shift, and is justifiable given Square’s product development track record,” he wrote. “Importantly, gross margins are expanding due to higher incremental margins on these new products.”
McCrohan, who rates Square’s stock a buy with a $61 price target, called the company’s lower-than-expected Ebitda margin outlook “acceptable” given revenue-growth trends at the company. Ebitda refers to earnings before interest, taxes, depreciation and amortization.
Of the 33 analysts who cover Square’s stock, according to FactSet, 17 rate it a buy, 13 call it a hold, and three label it a sell. The average price target is $49.42, 3.2% above current levels. Shares are up 163% over the past 12 months, while the S&P 500 has gained 10%.