KBW On Square: Waiting On The Sidelines

Following a sharp rebound, Square Inc’s SQ shares already reflect the company’s strong growth so far and the presence of significant market opportunity, while there exists execution risk to achieve elevated expectations, Keefe, Bruyette & Woods’ Steven Kwok said in a report. He initiated coverage of Square with a Market Perform rating and a price target of $13.

There were over 20 million businesses in the US that still did not accept card payments, analyst Kwok noted. He added that this represented a significant market opportunity for Square, which could drive future growth, along with the company’s plans to move upmarket and increase its exposure to international markets.

Expectations May Prove Too High

Square is expected to continue generating solid revenue growth and operating margin expansion. Kwok pointed out, however, that Square has been gaining market share mainly among micro merchants, a segment that was not the focus area of traditional merchant acquirers. As Square attempts to move upmarket and expand into international markets, the company would likely witness intensifying competition from existing and new players.

“Additionally, larger merchants typically require more specialized products and support, which could require higher levels of investment spend and elongate the timeline toward its long-term operating margin target,” the analyst wrote.

Rebound In Shares

Square’s shares have appreciated by 35 percent from their June lows. The company’s stock is currently trading “at about 27x our estimated 2018 enterprise value (EV) to EBITDA versus the peer average of 11x.”

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