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Straight Cash: Analysts Bullish On Square's Q4 Earnings, Outlook

February 27, 2020 2:25 pm
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Straight Cash: Analysts Bullish On Square's Q4 Earnings, Outlook

Square Inc (NYSE:SQ) reported fourth-quarter results highlighted by an earnings beat and a bullish outlook of its Cash App.

Square reported fourth-quarter cash earnings per share (CEPS) of 23 cents on total revenue of $1.31 billion versus expectations of 21 cents and $1.19 billion.

Transaction-based revenue of $832.18 million rose 25% from last year and beat estimates of $810.9 million. Subscription and Services-based adjusted revenues rose 45% at $281.4 million due to strength in Cash App, Square Capital, and Instant Deposit.

Related Link: Square Reports Q4 Earnings Beat

Positives And Negatives

Square's report should be "received well" by investors who were mostly expecting a "meaningful" drop in volume growth, Morgan Stanley analyst James Faucette wrote in a note. Encouragingly, a pricing change in November on instant deposit was expected to increase churn failed to show in Wednesday's results as it had minimal impact on gross payment volume (GPV) and drove three basis points of expansion in net take rate to 1.09%.

Management's decision to increase fees could be seen as a strategy to push merchants towards the free option available through Square Card. Instead, Square can collect interchange fees which would be an acceptable trade-off if it cannibalizes instant deposit fees.

Faucette said a "slight negative" takeaway from the quarter includes management's commentary related to seasonal headwinds in the seller business throughout the first quarter. Beyond the start of the year, management's guidance implies some deceleration in growth for the rest of the year.

Cash App By The Numbers

Square's Cash App exceeded expectations in the quarter as the Cash Card served as a big driver of revenue as it is used by more than 20% of active users, Stephens analyst Brett Huff wrote in a note.

Other key takeaways related to Cash App include a top-15 ranking on free Apps in Apple Store, growth in users from 15 million last year to 24 million and the Cash App accounted for 27% of overall gross profit.

2020 Outlook

Square's management offered a "solid" outlook for the year based on strong growth expecations in both the seller and Cash App ecosystems, Needham analyst Mayank Tandon said. Management said it will reinvest any potential revenue above its $5.9 billion to $5.96 billion back in the business to prepare for longer-term growth.

"We remain impressed by SQ's ability to generate strong growth especially within the Cash App ecosystem where both active users and revenue per active user are growing at rapid clips," the analyst wrote in a note.

Olivetree strategist Dan Forman said he would have liked to see Square offer an upward revision to its full-year EBITDA outlook. Since management is allocating revenue upside versus its guidance to reinvest in the business, it would be reasonable to assume that any upward revisions to EBITDA will come from out-performance and scale.

"We think the stock has scarcity value and, as we commented heading into the quarter to a few clients, we think the quarter highlights the disparity between a co. like MA with global exposure versus SQ which does not seem to be affected by the macro nCOV dynamic," Forman said.

Payment Disruption Confirmed

Square continues to improve its competitive positioning and will be able to win over larger customers through value-added products and next-generation software, SunTrust Robinson Humphrey analyst Andrew Jeffrey wrote in a note. In fact, a focus on increasing cross-over between Cash Card and the SMB card should accelerate growth moving forward.

The company doubled Software revenue (excluding Caviar) in 2019 and the research firm is estimating a conservative 46% growth in 2020. Equally as impressive, according to Jeffrey, is Square Cash's monetization of $30 per user versus Venmo at less than $10 per user.

Square Ratings And Price Targets

  • Wedbush maintains at Neutral, $75 price target.
  • Morgan Stanley maintains at Equal-weight, price target lifted from $70 to $75.
  • Stephens maintains at Overweight, $78 price target.
  • SunTrust maintains at Buy, price target lifted from $80 to $100.
  • Needham maintains at Buy, price target lifted from $80 to $105.

Square's stock traded higher by 5.7% to $81 per share at time of publication.

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