Oppenheimer Sheds Encouraging Light on Square (SQ) 1Q Earnings Show

While Wall Street was less impressed with SQ's second quarter EBITDA guide, here's why Oppenheimer's Jed Kelly is sticking tight with the bulls:


After Square Inc (NYSE:SQ) posted first quarter earnings for the year Wednesday evening, investors still sent the stock plunging 6% in after-market trading on back of a lackluster second quarter outlook. That said, Oppenheimer analyst Jed Kelly does not side with investors who wonder what is next for the payments company, believing that the company’s beat and raise suggest bigger share gains are coming.

Praising the “overall opportunity” ahead and various revenue prospects, the analyst reiterates an Outperform rating on SQ stock with a $52 price target, which implies a 6% upside from current levels. (To watch Kelly’s track record, click here)

For the first quarter, SQ unleashed a 1% year-over-year rise in total net revenue, beating out the analyst’s expectations by 4% and the Street by 5%. Quarterly gross payment volume (GPV) rose 31% year-over-year, aligning with the performance exhibited in the fourth quarter, outclassing the analyst’s forecast as well as the Street by 1%. Sellers hit more than $500,000, a whopping 74% year-over-year surge for SQ, with transaction revenue climbing 1% ahead of the analyst on back of 1.09% margins and encouraging product mix. Subscription services-based revenue likewise were a strong point for SQ in the first quarter, vaulting 98% year-over-year and 8% ahead of the analyst’s estimate, which Kelly attributes to Capital/Deposits/Caviar for “all driving the strength.” EBITDA increased 33% year-over-year, topping the analyst’s projection by 8% and the Street by 6%. “Revenue drives EBITDA growth, as 1Q18 margins -160bps y/y, as management reinvests into operations,” continues the analyst.  Gross profit flew 46% year-over-year, rising 3% ahead of the analyst’s expectations.

Another point Kelly commends in the print is an 8% boost in the net revenue guide for 2018, surpassing the analyst’s forecast by 6% and the Street by 5%. Worthy of note, the guide does not include the Weebly acquisition, anticipated to finalize in the second quarter. Yet, the EBITDA guide remains the same, coming up shy of the Street by 3% and the culprit for the sell-off of SQ shares. Though the second quarter net revenue guide outperforms the analyst’s forecast by 63% and the Street by 17%, the second quarter EBITDA falls 5% under the analyst’s estimate and 1% under the Street on back of weaker margins.

For 2018, the analyst boosts 2018 net-revenue 7% and 2019 net-revenue by 10% on a wave of subscription services strength. However, considering a rising reinvestment rate that has impacted lower margins, the analyst maintains his 2018 and 2019 EBITDA forecasts. For 2018, Kelly calls for $0.02 higher in non-GAAP EPS and $0.01 higher for 2019.

In a nutshell, “While management did not increase ’18E EBITDA guidance on its 8% full-year revenue guidance increase (does not include Weebly), we believe 1Q net revenue accelerating 4pts to 51% in 1Q, justifies the company’s investment approach. Bitcoin contributed $200k to net revenue, while and Weebly acquisition increases Omni channel capabilities. Despite larger merchants driving more GPV growth, transaction margins were consistent on a favorable product mix. Subscription-based services accelerated to 98% y/y on continued product momentum, and we were encouraged by Capital Originations re-accelerating by 12pts to +35% y/y. Quarter reiterates our view that SQ is a SMB platform,” cheers Kelly.

TipRanks suggests Wall Street is optimistic, yet cautious on this tech stock. Out of 28 analysts polled in the last 3 months, 17 rate a Buy on SQ, 9 maintain a Hold, while 2 issue a Sell. Notably, the 12-month average price target stands at $50.38, marking a slight 2% upside from current levels- reflecting some caution is baked into these analysts’ expectations.

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