As Square’s (SQ) stock is taking off again, some investors are questioning whether the company is a buy moving forward.
The company started the year hot, rising 42% by the end of February. But shares slowly started to decline, ultimately dropping 25% by the beginning of June. Since then, however, Square is back up 20%, or 28% for the year. Even as things are improving on the market, some are hesitant to buy-in. Wedbush analyst Moshe Katri is in this boat — the analyst maintains his Neutral rating on the stock, with a $75 price target. (To watch the analyst’s track record, click here)
Katri met with Square management and, while he continues “to like SQ’s merchant and consumer-facing monetization strategies driven by the company’s leading Apple-like standards of products and services,” he believes the stock is “fully valued.” He points to “near-term risks, including a constantly moving margin target” and the “lack of transparency in management’s plans for balancing investments and profitability.”
A key tenet in Katri’s assessment of Square is the management team. The analyst says the company has “reset” non-GAAP EBITDA guidance three times over the past 18 months. Per his meeting with Square’s former global head of sales, the analyst says there is “internal ongoing ‘conflict’ with finding the right balance between revenue growth, investments and profitability.”
A positive in Katri’s mind is Square’s “very profitable model,” which comes from a “frictionless merchant onboarding process” that does not require the “need for SQ’s internal support.” But while the operations may be seamless right now, “the company’s move/shift to larger merchants may require incremental sales, service and support, which will ultimately make the onboarding process incrementally more expensive, impacting margins.”
Though Katri expresses concern in Square’s growth to enterprise and large accounts, the company is finding success growing its product line. The company has transformed itself from a “simple” payment-processor to a financial services company. Square continues to release new financial products to corporate customers, creating an ecosystem which helps businesses with a wide range of services. By creating this one-stop-shop model, the company is looking to create a SaaS for banking, and generate recurring revenue through its ecosystem.
Wall Street is moderately optimistic on Square. The company is up big in 2019, but volatility remains high and some believe the high share price leaves little room for growth. TipRanks analysis of 22 analyst ratings shows a consensus Moderate Buy. Of the 22 analysts, 13 rate Buy and nine say Hold. There is an average price target of $86.26, representing a 17% downside to its current value. (To see SQ’s price targets on TipRanks, click here)