Coronavirus Weighs on Square’s Ecosystem, Estimates Lowered


Yesterday was a good day for stocks, with the market rebounding across the board following the announcement of a $2-trillion stimulus bill to help boost an ailing economy reeling from COVID-19’s sharp impact. The bounce was felt nicely at Square (SQ) as the point-of-sale and payment processing company gained 16% in the session. Despite the uptick, the fintech company’s share price is still down by 19% year-to-date. 

Although its market cap of $22.6 billion still places Square firmly in large-cap territory, the company is heavily reliant on small to medium sized businesses using its hardware and software products. 

Square announced on Tuesday that due to the impact of the coronavirus on gross processing volume (GPV), it is withdrawing its full-year 2020 guidance, in tandem with a revised revenue and gross profit outlook for the first quarter. GPV is an important metric for Square, as it is used to measure how much is spent using the company‘s mobile and point-of-sale products. 

Rosenblatt Securities’ Kenneth Hill cites the lower GPV as the reason for a reduction of 1Q EPS targets, too. The estimate comes down from $0.16 to 0.15, alongside a revision for full year 2020 EPS, which is reduced from $0.92 to $0.84. The 5-star analyst maintained a Neutral rating along with another reduction – the price target comes down from $72 to $52. Should the figure be met over the next year, investors stand to take home 3% gain. (To watch Hill’s track record, click here) 

Square noted that although January and February were strong months, with seller gross profit increasing by 32%over the last couple of weeks there has been a sharp downturn, with seller GPV down by 25% year-over-year. Taking the heaviest hit are merchants in the metropolitan areas, with volume decreasing by as much as 45% (compared to 20% outside metropolitan areas). “With about 26% exposure to food and drink and 17% to retailwe’d expect SQ’s transaction revenues to take a meaningful hit in the first half of 2020, Hill said.  

Although the 5-star analyst believes Square is a good business, the current uncertainty is keeping him on the sidelinesHill added, “SQ is diverting its upcoming ecosystem and brand awareness campaigns to re-prioritize investments that help customers (and potential customers) get through uncertain times. By reprioritizing investments, tightening cost and capital lending controls, and maintaining financial flexibility, SQ seems to be taking the right steps to help customers as well as protect its future. The opportunity set is interesting and large over time, but we must weather the current storm first.” 

All in all, the Street’s take is split evenly down the middle. 13 Buys and 13 Holds coalesce into a Moderate Buy consensus rating. More aggressive than Hill’s forecast, the average price target comes in at $65.88, and implies potential upside of 24% over the coming months. (See Square stock analysis on TipRanks) 

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