Market Overview

Craig-Hallum Initiates Square At Hold Citing Competition

Craig-Hallum Initiates Square At Hold Citing Competition

Craig-Hallum has started coverage of Square Inc (NYSE: SQ) with a Hold rating and $7.50 price target, saying that it sees near-term revenue tailwinds weighed down by longer-term risks with competitive headwinds.

Why A Hold Rating?

The brokerage also cited the unsustainable Square Capital business model and smaller TAM (total available market) than market perceptions.

San Francisco, California-based Square, led by Twitter Inc (NYSE: TWTR) founder Jack Dorsey, generates revenues by signing up merchants to accept credit/debit cards. It captures a spread between the amount charged and the amount paid to the merchant acquirer that processes the payments.

Related Link: What Apple Pay's Journey To Safari Means For PayPal, Visa And Mastercard

"While we're impressed with the democratizing payment solutions business that Jack Dorsey and Company has built, we believe there will be two camps emerging on Square: 'show me the money' vs. 'I'm willing to invest' in growing the underlying business model while investments compress the earnings," analyst Bradley Berning wrote in a note.

Berning is concerned that the longer-term risk factors will potentially pressure the stock, but remains aware of a "possible relief rally post the share lock-up pressure and the likelihood that management heard the message about missing expectations on expenses in Q1."

The analyst noted that Square's TAM is two-thirds smaller than investors realize; the brokerage's data show Square's addressable number of merchants is likely closer to 10 million versus the perceived 30 million.

Further, the rising competition from Paypal Holdings Inc (NASDAQ: PYPL), Stripe, Intuit GoPayment, ShopKeep, Revel and small specialized players like MindBody could pressure margins. Also, the company can't afford to move upmarket due to higher capital spending.

Looking Forward

"Square is moving upmarket to add scale, but we believe that based on PayPal's development spending, Square will need to nearly double spending on mobile and online offerings to generate consensus expectations of $100+ billion of payments volume by 2020," Berning highlighted.

The analyst noted the regulatory and competitive risks to Square Capital, which provides short-term business loans to merchants, as the pricing model is "unsustainably structured and lacks transparency."

Berning said, "Regulators view the advertised 10–15 percent industry flat fee approach used by Square and small business online lenders as misleading because it obscures an APR (Annual Percentage Rate) ranging between 26 percent and 43 percent. Furthermore, new competitors have recently entered this market, including Wells Fargo & Co (NYSE: WFC) with a 14–23 percent APR."

Related Link:Gene Munster Says Apple Pay A Legitimate Threat To PayPal's Staying Power

"Consensus appears to be assuming Square Capital will contribute over 40 percent of 2020 pre-tax operating profit; we question this given the regulatory and competitive risk," Berning noted.

The analyst expects Square to be profitable by 2020, but "we doubt investors fully comprehend that vesting and profitability will bring a 60 percent increase in share count as employee stock options get factored in."

Berning projects adjusted loss of $0.08 and $0.07 a share for 2016 and 2017, respectively. The analyst forecast 2016 revenue of $663 million (Street: $1.61 billion) and 2017 sales of $835 million (Street: $1.97 billion). The consensus calls for a loss of $0.62 a share for 2016 and $0.33 a share for 2017.

At the time of writing, shares of Square were up 1.63 percent at $9.03.

Latest Ratings for SQ

Jan 2021KeyBancMaintainsOverweight
Jan 2021Evercore ISI GroupMaintainsOutperform
Dec 2020BairdInitiates Coverage OnNeutral

View More Analyst Ratings for SQ
View the Latest Analyst Ratings


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