Square Rises as Analysts Call Results ‘So...Much...Better’

(Bloomberg) -- Shares of Square Inc. rose as much as 5.8% in early Thursday trading, after the company reported earnings per share for the quarter that beat analyst estimates. At the same time, it doubled down on spending and raised questions about its growth and margin trajectories.

Square has underperformed so far this year, with a gain of 15% compared with the S&P 500’s 23% rally and a 20% increase for PayPal Holdings Inc.

See our earnings preview for more: Square’s Revenue Growth Peaked and Bears Are Taking Notice

Here’s a sample of the latest commentary:

MoffettNathanson, Lisa Ellis

“We believe the slate is now truly clean, and Square’s performance is greatly derisked for 2020,” Ellis wrote in a note. Results that were “so...much...better” followed a “painful” 12 months for investors, with the stock down 26%, as the company has shifted its leadership and strategy, including shedding Caviar and moving away from initiatives like international expansion, vertical-specific software and Eventbrite to focus on its core seller and emerging Cash App businesses.

The results show growth in gross payment volume, or GPV, “has already stabilized and begun reaccelerating,” while Square has now“reset margins to a conservative level to reflect the much-needed seller sales and marketing investments.” With clear growth trajectories and profitability of Square’s seller and consumer businesses, stock performance may begin tracking more closely with Ebitda growth, Ellis said.

Ellis reiterated her buy rating and target price of $85.

Bernstein, Harshita Rawat

Bernstein sees two key stock “controversies” post-third quarter: Whether aggressive re-investments point Square’s willingness to accelerate revenue growth, or whether they reflect deteriorating trends in the core seller business and the growing cash app business; and when more investing might result in GPV and revenue acceleration.

Read more: Nov. 5, Square’s Heavy Spending Failed to Buy User Loyalty, Nomura Says

Shares may rise as the “market gets comfortable with ‘underlying’ margins pre-reinvestments,” which appear strong, and with GPV stabilization or acceleration in 2021, she said. Rawat noted negative revisions for 2020 were already baked into the stock, and added that Square’s investor day in March is “likely a positive catalyst.”

She kept her rating market perform on concerns about long-term GPV deceleration as Square “continues to move from its open-pastures of micro-merchant base to an intensely crowded field of SMB merchants.” Rawat is also worried about “late-cycle risks on Square’s high beta multiple.”

Bloomberg Intelligence, Julie Chariell

“Square joined other fintechs in boosting spending plans as the stakes rise in the fast-growing, increasingly competitive digital-payments market. From Mastercard to MercadoLibre, companies are forgoing margin gains to invest in growth, sometimes via acquisitions, and in Square’s case, with the proceeds from its sale of Caviar. A delay in planned spending helped adjusted Ebitda margin temporarily in 3Q, but Square will double down on spending into 2020 to boost brand awareness and cross-sales in the Seller business and add products to drive CashApp engagement, including investment services. This will keep margin flat in 2020 at about 18%, below consensus.”

BTIG, Mark Palmer

Square’s plan to ramp up market expenses turns 2020 into an “investment year,” with lower-than-expected adjusted Ebitda and slowing GPV growth, Palmer wrote in a note. He expects analysts will significantly cut estimates for next year.

“Square’s multiyear transition from a payment processing company focused on micro-merchants who the company acquired with little or no marketing expense to one largely focused on larger merchants for whose business they need to compete – and spend – entered a new phase” with the company’s results, he said. “Whether the payback materializes is uncertain,” he said. Palmer reiterated his sell rating, with a target price of $30.

Wolfe, Darrin Peller

The quarter “highlighted healthy trends,” including stablized GPV growth and Cash App revenues of $159 million, versus the second quarter’s $135 million, net of Bitcoin, Perrin wrote.

Even so, he saw a focus on Square’s 2020 outlook. “We suspect investors will look for signs of traction/payback — which likely won’t flow through until late 2020,” Perrin said. That may mean shares will stay range-bound until there’s more news at Square’s March 2020 analyst day.

Perrin cut his price target to $70 from $81; he rates shares outperform.

KBW, Steven Kwok

“Square reported good third-quarter results with stabilization in GPV growth, but the company’s forward commentary around flat Ebitda margin in 2020 was tempering as management continues to make investments to drive incremental revenue in late 2020 and into 2021,” Kwok wrote. Much of the weaker-than-expected margin outlook may already be in shares, and “sets a lower base that management can build off of,” he said.

KBW is staying “on the sidelines given our concerns around the pace of investments needed to continue to sustain the revenue growth”; maintains market perform.

Cowen, George Mihalos

Square posted “solid” third quarter results, with revised 2019 guidance reflecting “strong underlying business trends offset by the Caviar sale and reinvestment.” Square’s 2020 framework showed a “higher level of investment than we had previously contemplated,” Mihalos wrote. He expects a “sizeable increase in both revenue/margin expansion” in 2021. Rates shares market perform.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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