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Is Square Overvalued Despite Its Growth Potential? Pros Weigh In

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Is Square Overvalued Despite Its Growth Potential? Pros Weigh In
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  • Shares of Square Inc(NYSE: SQ) have lost nearly 9 percent since its IPO in late November.
  • Analysts at several Wall Street firms initiated coverage of Square on Monday.
  • The bearish-themed notes pointed out that Square's future growth is already priced into the stock while the bullish research highlighted the company's attractive growth profile and large market.

Square's stock has lost nearly 9 percent since its IPO debut in late November. Here's what new analysts are saying after they initiated coverage this Monday.

Morgan Stanley: Valuation Concerns

Vasundhara Govil of Morgan Stanley initiated coverage of Square with an Equal weight rating and $12 price target.

According to Govil, Square has "revolutionized" and "disrupted" the payments space given its "compelling value offer" to micro and small merchants, future growth is already priced in to the current valuation.

According to Govil, Square is well positioned to further monetize its two million users and cross-sell software and other relevant non-payment services. The analyst noted that this represents a "much larger addressable market" versus payment processing and the company's non-payment revenue base is "still small" and visibility into improvements is "low."

Govil also added that Square's long-term margin outlook is "uncertain." As such, the analyst recommended investors stick to the sidelines.

Shares were initiated with an Equal weight rating and $12 price target.

Related Link: Square Has Lost 52% Of Value In Past Year

JPMorgan: ‘Intangibles To Disrupt'

Tien-tsin Huang of JPMorgan initiated coverage of Square with an Overweight rating and $14 price target.

According to Huang, Square is a "bona fide growth company" that can grow twice as fast versus the next fastest public

Huang continued that timing is "favorable" for Square to monetize its target market as "small businesses crave new technology beyond payments to run their businesses better." Given this new thinking, Square can make use of its "roots in new technology in a legacy heavy market."

Finally, Huang acknowledged that Square's stock "isn't cheap" at 7.5x FY16E revs, but with the FinTech group trading near peak valuations, Square's "non-traditional high growth" can justify a premium valuation.

Barclays: ‘Underpenetrated' Market

Darrin Peller of Barclays initiated coverage of Square with an Overweight rating and $15 price target.

According to Peller, despite Square's prior success in the micro-merchant and SMB (small & medium-sized business) space, the market is still "underpenetrated" and "large."

Peller continued that Square's gross payment volume for the micro-merchant and SMB space has been approximately $30 billion over the last 12 months, representing around one percent of total sales volume. The low penetration suggests the company has "material room for continued strong growth."

Finally, Peller stated that Square's software/data products are good financing and analytics solutions for small and larger merchants, and marks a "compelling pathway" towards a long-term strategic goal of dominating the $8 trillion in sales mid-market merchants.

Related Link: Who Wins From Square's IPO?

RBC: ‘Virtuous Cycle'

Daniel Perlin of RBC Capital Markets initiated coverage of Square with an Outperform rating and $15 price target.

According to Perlin, Square's current total addressable market is approximately $200 billion in the US, including payments and POS along with financial and marketing services. The analyst added that company has built a "product roadmap" for SMBs, which allows its clients to grow alongside one another and create a "virtuous cycle."

Perlin continued that Square's success can be validated by its long-tenured cohort retention rate of 110 percent. In addition, the company could achieve a revenue compounded annual growth rate of 30 percent over the near-term.

Finally, Perlin suggested that Square will be valued mainly on an EV/revenue metric. Based on the company's EV/revenue multiple of approximately 7x CY17E, shares should be trading at $15 per share. The analyst also noted that a discounted cash flow model and sensitivity analysis surrounding transaction expense variability also supports a similar valuation.

Elsewhere On The Street

  • Analysts at Deutsche Bank initiated coverage of Square with a Hold rating and $13 price target.

  • Analysts at Jefferies initiated coverage of Square with a Buy rating and $15 price target.

  • Analysts at Stifel Nicolaus initiated coverage of Square with a Hold rating.

  • Analysts at Susquehanna initiated coverage of Square with a Neutral rating and $14 price target.

Latest Ratings for SQ

DateFirmActionFromTo
Feb 2018Deutsche BankMaintainsBuyBuy
Dec 2017Cowen & Co.Initiates Coverage OnMarket Perform
Nov 2017BTIG ResearchDowngradesNeutralSell

View More Analyst Ratings for SQ
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