After Square's Q3 Beat, Analysts Tackle The Payment Platform's Future

Shares of Square Inc SQ erased early morning losses Thursday and were trading higher by around 0.50 percent in reaction to the company's third-quarter earnings report and guidance.

Morgan Stanley: 'Unsurprisingly' Strong Quarter

Morgan Stanley's James Faucette maintains an Equal-weight rating on Square's stock with an unchanged $26 price target.

Square's third-quarter earnings report was "unsurprisingly strong," as the company continues to benefit from its "aspiration brand," new product launches and ability to attract customers at low costs, Faucette said in a note. But at the same time, the earnings report featured a "modest" EBITDA upside versus prior quarters, which some investors view as disappointing given the stock's outperformance.

Square's strategy of introducing new products to achieve faster growth will come at the expense of margin upside, the analyst said. Whether this generates a longer-term superior value depends on the following, Faucette said: 

• Clarity on the company's total addressable market.
• Potential attach rates for these new products.
• The take rate accretion from new products.
• The evolution of competitive pricing dynamics.

Barclays: Evolution Continues

Barclays Darrin Peller maintains an Overweight rating on Square's stock with an unchanged $37 price target.

Square's earnings report shows the company continues to evolve from a micro-merchant enabler into a "more dynamic provider" of an entire suite of payment and business tools to larger merchants, Peller said in a note. Proof of this lies in the many favorable metrics seen in the quarter, including 64 percent year-over-year growth in revenue from midmarket merchants and 44 percent growth in larger sellers, Peller said.

Square's momentum is expected to continue, partly due to new product launches such as Square Register and a favorable partnership with Eventbrite, the analyst said. The company's 30 percent-plus revenue growth profile — along with the likelihood of EBITDA margin expansion in the coming year — justifies a premium to Square's stock at 10x EV/sales, according to Barclays. 

Related Link: 4 Opportunities In Square's Future That Make It A Buy

Credit Suisse: Is Square PayPal?

Credit Suisse's Paul Condra maintains a Neutral rating on Square's stock with a price target boosted from $26 to $31.

Over the next seven years, Square should manage to grow its EBITDA and EPS at an average rate of 40 percent, and EBITDA margins will read 36 percent by 2024, Condra said.

Paypal Holdings Inc (NASDAQ: PYPL) boasts a 2x EPS growth profile, according to Credit Suisse. The stock is trading at 27.6x the analyst's 2019 EPS forecast and 18x the 2019 EV/EBITDA, Condra said. Paypal's total addressable market is "significantly larger" compared to Square, so investors should apply a slight discount to Square's stock relative to Paypal, he said. 

"Considering all this, we use slightly less than 2x PYPL's valuation to value SQ. We use a 50x PE on our 2019 EPS (whereas 2x PYPL would be 55x) and a 30x EV/EBITDA on our 2019 EV/EBITDA (whereas 2x PYPL would be 35x). This yields a price target of $31," Condra said.