3 Reasons Square Is A Buy

Nomura sees 25 percent potential upside in shares of Square Inc SQ as it started coverage of the stock with a Buy rating and $18 price target, given the company’s consistent share gains in the integrated payments sector.

Square benefits from a solid product, strong brand, and high visibility in a largely commoditized merchant acquiring space.

“At ~40% YTD GPV (gross payment volume) growth, SQ has outgrown its markets by nearly 1,000bps in recent quarters, we estimate,” analyst Dan Dolev wrote in a note.

Dolev sees ample room for further growth given the penetration of independent software vendor (ISV) is still small. The analyst says ISVs and merchant aggregators account for less than 10 percent of U.S. bankcard volumes but drive 30 percent of the industry's growth.

The brokerage’s model shows large merchants growing 5-6x faster than smaller ones, which should result in GPV doubling by 2020 as the pressure on pricing remains muted. Dolev projects 20 percent plus GPV CAGR by 2020 to $105 billion.

“Despite the mix shift to larger sellers, our model shows pricing headwind should remain modest at 2-3bps per year,” Dolev continued.

In addition, Dolev’s peer incremental cost analysis shows 90 percent plus EBITDA CAGR by 2020 with margins growing to 25 percent (vs. 7 percent in the third quarter). The margin upside should come from operating leverage improvements and margin accretive products like Square Capital.

At last check, shares of Square were up 0.91 percent to $14.49.