Citi Turns Bullish On Square, Says Payments Company Underappreciated By Street

A look at 2019 projections for Square Inc SQ suggests the Street is underappreciating the payments company's outlook, according to Citi.

The Analyst

Citi's Peter Christiansen upgraded Square from Neutral to Buy with a price target lifted from $67 to $90.

The Thesis

Square is offering investors and Street analysts greater details into its growth outlook, although basic details "remain quite thin," Christiansen said in the upgrade note. (See his track record here.) 

Using basic assumptions for the company's revenue retention, the analyst estimated that the consensus estimate for 42-percent revenue growth next year is understated by nine points.

Square should show 52-percent revenue growth in 2019 due to projected 30-percent growth in gross adds and 120-percent revenue retention, he said. 

Square confirmed in regulatory filings that it will be increasing its San Francisco office space by 34 percent by February, the analyst said. This would be consistent with a 15-percent increase in the number of open job positions since Citi last checked the data in April 2017.

The increase in office space is a sign of confidence in management's outlook beyond this year, Christiansen said. 

From a valuation perspective, Square's stock price assumes it will grow revenue at a 10-year compounded annual growth rate of less than 20 percent and/or less than 2-3-percent EBITDA expansion per year, the analyst said. 

It's reasonable to assume Square's status as both a "low-end disruptor" and a "new market player" should help it grow revenue at a 20-25-percent CAGR rate, which is consistent with what other high-growth payment companies have shown in the past, he said. 

Square should also be able to add two to three points of annual EBITDA margin expansion, the analyst said. At the high end, this would value Square's stock at $110 per share and $81 at the low end, for a midpoint of $90 per share.

Price Action

Square shares were up 5.22 percent at $78.94 at the time of publication Tuesday. 

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Photo courtesy of Square.