Is Square Still Hip? Street Weighs In After Outlook Disappoints

Square Inc SQ reported first-quarter results that came in better than expected, but management's second-quarter guidance missed on the top- and bottom-line. Here is a summary of how some of the Street's top analysts reacted to the print and outlook.

The Analysts

Bank Of America's Jason Kupferberg maintains a Neutral rating on Square's stock with an unchanged $78 price target.

Wells Fargo's Timothy Willi maintains at Market Perform, unchanged $80 price target.

Wedbush's Moshe Katri maintains at Neutral, unchanged $75 price target.

Morgan Stanley's James Faucette maintains at Equal-weight, price target lowered from $75 to $74.

Mizuho Securities' Thomas McCrohan maintains at Buy, price target lifted from $85 to $87.

KeyBanc Capital Markets' Josh Beck maintains at Overweight, unchanged $100 price target.

Guggenheim Partners' Jeff Cantwell maintains at Buy, price target lifted from $92 to $94.

Square's stock traded lower by 8.2 percent at $67.63 per share at time of publication.

BofA: Guidance Spoiled 'Strong' Q1

Square reported another beat although the magnitude of revenue outperformance of 2 percent is "well below" the two-year average of 4.2 percent, Kupferberg said in a research report.

The company saw a subscription and services-based revenue growth of 126 percent from last year, transaction-based revenue grew 25.6 percent. Total GPV grew 26.7 percent although this represents a deceleration of 180 basis points from the fourth quarter and marks the largest sequential decline seen in two years.

The analyst said Square's first-quarter strength is overshadowed by management's "light" guidance, a decelerating adjusted EBITDA margin expansion outlook for the full year and slowing year-over-year GPV growth.

Wells Fargo: Bull And Bear Takeaways

Square's report is highlighted by two bullish takeaways and two bearish takeaways, Willi said.

On the positive side:

  1. On an organic basis, subscription and services-based revenue grew 97 percent and revenue from the Cash app rose more than 2.5 times year-over-year;
  2. Transaction-based revenue and profit as a percentage of GPV came in better than expected; and
  3. EBITDA margin rose 90 basis points from last year to 12.6 percent.

The two bearish points include:

  1. GPV growth decelerated from the fourth quarter and resulted in a slight miss in transaction-based profit;
  2. Despite a $30 million lift in full-year 2019 revenue guidance, the full year EPS and EBITDA guide was kept the same.

Related Link: Analyst: Square Card Could Add $100M In Annual Revenue

Morgan Stanley: The Good, The Neutral, The Bad

Square's earnings includes one "slight positive" whereby management is showing progress in growing its interchange revenue from its card products, Faucette said. Specifically, active sellers spent more than 20 percent of their GPV through the Square Card while the Cash Card saw an increase in store balance of more than three times.

Square did see strong growth in its core flex loans, but there's no reason to suggest its consumer underwriting business stands out against the competition. The analyst said it wouldn't be a surprise if some of the newer products are experiencing higher loss rates.

Wedbush: 'Constant Conflict'

Square's status as boasting one of the "most unique" monetization models within the entire payments space remains unchanged, Katri said. However, the company did show slowing volume growth in the first quarter which may be due to the growing competitive landscape.

Square needs to consistently invest in innovation to maintain its lead, according to Katri. This creates a "constant conflict" in balancing capital allocation and profit.

Mizuho: Margin Growth

Square's report was boosted by ancillary products like Cash Card, McCrohan said. Management's upward revised revenue guidance for the year implies the company will invest into the business and this "makes strategic sense" as it should generate a full year revenue growth rate "well above" its rivals.

McCrohan said Square's margin expansion can come when the time is right to temper its investment activity. Square has the potential to show superior margins versus the traditional scale players when it decides to scale down its pace of investment.

KeyBanc: Bulls Win Key Debate

One of the more contested metrics bulls and bears debate is the "closely watched" subscription and service business, Beck said. Square beat consensus estimates by $18 million, which is a "touch below" the combined 2018 and 2019 average beat.

Bears will point out the metric decelerated versus the back half of 2018 but the segment is approaching a $1 billion run-rate and still grew organically by an "impressive" 97 percent.

Guggenheim: Sustainable Growth Beyond 2020

Square performed mostly in-line with expectations in the quarter and the company should be able to sustain a top-line revenue growth at or above industry averages through 2020 and beyond, Cantwell said. Square not only has strong underlying momentum, but an expansion of its product lines on both the consumer and merchant side of the business will fuel revenue growth over time.

Photo courtesy of Square.

Posted In: Bank of AmericaGuggenheim PartnersJames FaucetteJason KupferbergJeff CantwellJosh BeckKeyBanc Capital MarketsMizuho SecuritiesMorgan StanleyMoshe KatripaymentsThomas McCrohanTimothy WilliWedbushWells FargoAnalyst ColorEarningsFintechNewsGuidancePrice TargetTop StoriesAnalyst Ratings