This Analyst Finds It Best to Wait on Buying Square Inc (SQ) Until More Attractive Entry Point Comes Around

Cowen's Georgios Mihalos makes a neutral case on Square's opportunity, giving kudos to its "Build with Square" integrated strategy, but seeing growth opportunities priced into the current stock price.


Square Inc (NYSE:SQ) may be in solid standing to yield revenue growth, all while eyeing a total addressable market worth tens of billions of dollars, but one analyst is ushering in a new perspective safely from the sidelines.

While Cowen analyst Georgios Mihalos sees a tech player that revs with potential past that of a “merchant acquirer” or mere “payments processor,” when assessing Square’s growth prospects, he nonetheless advises investors to “wait more a more attractive entry point” before taking the gamble on the mobile payments company.

“We believe Square’s growth prospects are reflected in the current stock price,” Mihalos writes, initiating coverage with a Market Perform rating on SQ stock with a price target of $36, which implies a 6% downside from current levels. (To watch Mihalos’ track record, click here)

Between 2017 and 2020, the analyst sees Square as “very well positioned” to yield an adjusted revenue shooting past 25%, all with a revenue prospect that “extends” high past the initial expectations of $16 billion to $18.5 billion for the traditional merchant processors. Rather than simply seeing Square as a processor, Mihalos makes the important distinction that the tech firm is a “platform.”

Glancing ahead, could one of the networks takeover Square? True, the media has buzzed about the possibility, but Mihalos dismisses this view as “highly unlikely,” explaining the priority for the networks are the conversion of cash to card. Here, Visa and Mastercard reign the grounds, no matter “what entity issues the cards and who processes the payments.”

Software-wise, the analyst spots reason for the company to keep pushing past its “horizonal” game plan to one revolving around “vertical-specific software solutions,” of the likes of e-commerce and restaurants.

Worthy of note, Square’s integrated strategy hinges upon “Build with Square,” which opens various APIs to enable sellers with third-party POS systems and/or their respective websites to come together thanks to this platform.

This is crucial as well as advantageous for Square, as Mihalos argues that the strategy first allows Square to “tap into” new vertical specific markets the platform could not reach before with its horizontal game plan. “Now SQ can provide payment processing to sellers with their own vertical-specific, specialized software which it was unable to do with its basic dashboard,” the analyst underscores.

Secondly, “Build with Square” makes it possible for Square to reach “a market outside of [its] original offerings,” by enabling the platform to service both e-commerce as well as omni-channel sellers. Mihalos believes, “The launch of Build With Square is an important development that should allow the company to tap into the fast growing ISV referral channel and more aggressively move upstream to service larger, more vertical-specific merchants.”

Overall, “While we believe SQ’s superior growth deserves a premium multiple, the current 2019E EV/EBITDA is too rich, in our view, especially when we expense stock-based comp (expensing stock-based comp results in a 72.4x multiple),” the analyst surmises.

TipRanks indicates a cautiously optimistic analyst consensus backing Square, with 11 of 24 analysts polled in the last 3 months rating a Buy on the tech stock, 12 maintaining a Hold, and 1 issuing a Sell on the stock. The 12-month average price target stands at $38.05, aligning with where the stock is currently valued.

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