Square's Stock Should Recover: Here's Why

Square Inc SQ reported robust 1Q16 results, with the adjusted revenue of $146 million well ahead of the estimate and the consensus.

Goldman Sachs’ James Schneider maintained a Buy rating on the company, with a price target of $15.

“We maintain our Buy rating despite the pullback in the stock as, ultimately, we believe continued fundamental momentum should drive the stock to recovery as the company executes,” the analyst explained.

Solid Results

Although the Software and Data Product revenue was in line with the estimate at $24 million, Square Capital advances came in at a robust $153 million, despite management noting a delay in signing two new investors having impacted the results.

Adjusted EBITA was, however, below the estimate, due to marginally higher opex.

The company raised its full year 2016 revenue guidance, in-line with the prior estimate, with the adjusted EBITDA guidance being raised above the consensus forecast.

Positives

“We see the quarter as very solid across most metrics,” Schneider said, adding, “Margin trajectory continues to improve, with Square on track to break even in 2Q16, ahead of the Street.”

Schneider mentioned that large merchant traction continued to be on track, with Square delivering 39 percent GPV from merchants.

The analyst expects Square to drive meaningful growth through continued growth in payment processing, as well as cross-selling ancillary services to its merchant base.

“While the market remains skeptical of Square’s ability to ramp margins, we expect it to drive increased profitability as it builds scale outside of payments,” Schneider added.