Wedbush Sees Competition, Regulatory Scrutiny As Long-Term Headwinds For Square, Inc

Although Square Inc SQ reported its 2Q results ahead of expectations, the company’s growth is likely to decelerate over the next couple of years, Wedbush’s Gil Luria said in a report. He maintained a Neutral rating on the company, while raising the price target from $8 to $10.

Square reported adjusted revenue of $171 million, ahead of the consensus estimate of $158 million. The beat was driven by solid GPV growth of 42 percent y/y and capital acceleration. “Adjusted EBITA of $13 million exceeded consensus of flat margins as company realized better-than-expected benefits of scale and all-time high add-backs for stock compensation,” analyst Gil Luria wrote.

Square raised its full-year adjusted revenue guidance from $615-$635m to $655-$670m and its adjusted EBITDA guidance from $8-$14m to $18-$24m.

Growth To Decelerate

Luria expects a slowdown in Square’s growth over the next couple of years, with an increase in competition and the micro merchant market reaching saturation. He added that Square’s peak margins would likely be “structurally lower than peers,” given the company’s higher processing costs, transaction losses, facilities costs, employee costs and proportion of money-losing customers.

The lending business could also be adversely impacted by new regulation from US Treasury, the analyst commented.

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