Square Going Heavy On Stock-Based Compensation, Could Delay Push For Profitability

Morgan Stanley’s James E. Faucette believes the upside opportunities for Square Inc SQ are largely reflected in the current stock valuation.

Faucette maintains an Equal-Weight rating on the company, while lowering the price target from $12 to $10.

Elevated SBC Levels

The analyst believes the Stock-Based Compensation (SBC) is at elevated levels, partly due to the timing of grants and employee retention initiatives.

The SBC estimates have accordingly been raised, which in turn raises the GAAP opex estimate.

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Faucette explained that the increase in the estimate was due to “1) refinement of SBC estimates for coming quarters as SQ transitions from a private to public entity, 2) higher SQ share price at the time of 1Q16 grants, and 3) higher comp to select personnel vs. prior expectations.”

The analyst now expects Square’s SBC at 20–25 percent of adjusted revenue in the coming years, as compared to the earlier estimate of 12–15 percent.

Profitability Pushed Out

“This cost increase also pushes out the company's breakeven potential/profitability by several quarters, for investors that focus on GAAP metrics,” Faucette mentioned.

However, the analyst believes that the company is well positioned to benefit from “1) greenfield opportunity in card payments from micro merchants, 2) opportunity to upsell software into the payments base, and 3) potential share gains upmarket.”