Square Is The Emerging Payments Platform; Stifel Upgrades To Buy

Square Inc SQ has delivered three quarters of consistent execution on both the top-line and bottom-line, Stifel’s Scott W. Devitt said in a report. He upgraded the rating on the company from Hold to Buy, while establishing a price target of $15. The analyst commented that there was now greater confidence in Square’s growth and profitability outlook.

Terming Square as the emerging payments platform, analyst Devitt mentioned three factors to consider:

How Sustainable is Square’s Core Business Growth?

Despite concerns surrounding competition and the size of the TAM, Square achieved higher-than-expected top-line growth.

“We believe the company can continue executing on the top-line with the extension of products/services (effectively widening the TAM), continued momentum with larger merchant adoption, and ongoing tailwinds from the secular shift to electronic payments as well as the transition to EMV,” Devitt wrote.

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How Large Can Square’s Ancillary Businesses Get?

Software services have expanded from 4.9 percent of adj. net revenue in 3Q15 to 7.3 percent in 2Q16. Citing the positive trends in this business, the analyst commented that Square seemed to have the ability to continue “its trajectory based on the growing larger merchant mix (higher attach rates) and growing capital business which employs a unique payback structure that offers Square greater visibility.”

Can Square Effectively Move Up-market?

Large merchants, with more than $500K in annual GPV, comprised merely 6 percent of total GPV in 1Q14. This has grown to 14 percent of GPV. “Initially we held concerns of Square’s ability to move up market given more competition from merchant acquirers and competing POS systems. However, recent results have demonstrated the company’s ability to gain share among larger merchants,” Devitt stated.

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