Buy Square: Goldman Sachs' Takeaways From CFO Meeting

Goldman Sachs’ James Schneider believes Square Inc SQ's “prospects of penetration with large merchants, its ability to monetize smaller merchants with software and lending, and its margin potential are significantly under-appreciated.”

Schneider maintains a Buy rating on the company, with a price target of $15.

Takeaways

Schneider believes Square realizes “software solutions and custom pricing will be needed for penetration, but thinks that it can be competitive up to ~$20 million in volume.”

On the other hand, Square Capital has continued to gain robust traction, with its loan size now at $6,000 and “an upper bound rate of penetration ~10X current levels.” In addition, Square Capital has been able to keep its loss rates at below 4 percent.

Making Progress

The company has also made progress in terms of new products, having developed more sophisticated POS software with ERP capabilities. The analyst believes this software could be launched in 2017, targeting retail, restaurants and health & beauty.

“Square continues to manage investments to balance revenue growth with margin expansion, and believes that it can deliver mid-single digit EBITDA margin expansion in 2017 and beyond after 20 points of expansion in 2016,” Schneider went on to say.

Square had reported robust third quarter results, which was well received by investors, with the stock moving up 4 percent on November 2, following the results.

The company has also announced the appointment of Hillary B. Smith as its general counsel on November 2.

Although Square has taken a long time to enter the U.K. market, the company expects its path to break even, following its formal launch in the country, to be “relatively quick”.

In Monday's pre-market session, Square was up 1.6 percent at $12.07.