Why is Square Inc (NYSE:SQ) taking a 5% dip this morning when yesterday evening’s first quarter earnings showcase delivered an adjusted EBITDA outclass and a boost in the payment company’s full-year guide? The company now boasts even more confidence for the revenue power it can reach in 2018, but investors are nonetheless antsy today.
BTIG analyst Mark Palmer sounds off for the bears, noting that the first-quarter beat-and-raise is “overshadowed by new AMZN threat.” The threat Palmer sizes up stems from media buzz that has “shaken” the payment arena: Amazon seeks to fuel adoption of its online payments platform Amazon Pay by offering to discounts to retail merchants utilizing the service. The news hit “less than two hours before SQ released its 1Q18 report,” notes Palmer, who likewise puts a “weak” second quarter EPS guide in the spotlight.
Believing SQ remains expensive in its valuation, the analyst reiterates a Sell rating on SQ stock with a $30 price target, which implies a close to 35% downside from current levels. (To watch Palmer’s track record, click here)
Regarding the sell-off, Palmer makes a bearish case for the downturn in SQ shares today: “We believe that apparent disconnect can be attributed to three primary factors, with a fourth factor perhaps having some impact as well.”
“The [Amazon] report emerged just days after SQ announced its acquisition of Weebly, a website creation platform, which the company framed as part of its effort to push from in-person payments to omnichannel commerce,” Palmer explains, adding: “In that regard, a more robust push by AMZN into the online payments space is bound to be viewed as a potential headwind for SQ, in our view.”
Next, Palmer points to the second quarter guide as a culprit. Though the adjusted revenue range of $355 million to $360 million outclassed consensus expectations calling for $335 million, the adjusted EPS outlook for the second quarter is a different story. Where the Street was calling for $0.12 in adjusted EPS, SQ’s team set expectations between $0.09 to $0.11, coming up short.
“Third, SQ’s lofty valuation – the stock trades at 29x FY20E adjusted EBITDA – has baked into it such high expectations that a report featuring a solid beat-and-raise and attractive volume and revenue growth rates may no longer be sufficient to spark additional share price appreciation, in our view,” concludes Palmer.
TipRanks suggests Wall Street is optimistic on Square’s prospects at play. Out of 27 analysts polled in the last 3 months, 17 are bullish on SQ stock, 8 hedge their bets on the sidelines, while 2 are bearish on the stock. With a return potential of nearly 4%, the stock’s consensus target price stands at $50.50.