Square Inc (SQ): A Story of Overbaked Hope and Uncertainty?

BTIG's Mark Palmer likewise is not swayed by the Bitcoin craze, believing investors are "overly" confident in its impact on SQ stock.

Square Inc (NYSE:SQ) shares are rising 3% after CEO Jack Dorsey’s tech company delivered a nice fourth quarter beat yesterday evening on revenue and adjusted EBITDA. However, one bearish voice sounds off unimpressed with a less-than-stellar first quarter guide for 2018, which he believes speaks to quite a “steep climb” ahead for the company.

BTIG analyst Mark Palmer is critical of just “how light” the company’s first quarter guide hit for adjusted EBITDA, underwhelming Street-wide expectations.

For the first quarter of 2018, the SQ team guided adjusted EBITDA to a range between $30 and $33 million, a far cry from the Street’s forecast looking for $46.1 million. Considering the midpoint of that range points to an adjusted EBITDA margin of 11%, this falls far under the 15% margin SQ reported during its fourth quarter as well as the 19% margin the company set for its full-year 2018 outlook. The SQ team point to seasonality when it comes to this softer-than-anticipated first quarter guide for 2018 on adjusted EBITDA along with further reinvestment in the business, which SQ hopes will beget gains down the line.

“The upshot is that SQ management’s FY18 quarterly adjusted EBITDA chart must resemble a hockey stick, with the flat blade representing 1Q18 followed by sharply higher growth in subsequent quarters. We believe this increases the pressure on management to deliver superior performance during the last three-quarters of the year while putting SQ into the ‘show me’ category during that period. The overly optimistic future impact of SQ’s Bitcoin initiative that we believe is baked into its stock price, as well as this ‘on-the-come’ FY18 adjusted EBITDA guidance, represent elements of excessive hope and newfound uncertainty that are not consistent with a super-premium valuation, in our view,” indicates Palmer.

In a nutshell, Palmer sticks with the bears here, concluding: “we believe that with the stock trading at almost 27x FY20E adjusted EBITDA its valuation already reflects unimpeded rapid growth when competitive, credit-related and macro factors that could moderate the pace of its expansion have not gone away.”

As such, the analyst reiterates a Sell rating on SQ stock with a $30 price target, which implies a just under 37% downside from current levels. (To watch Palmer’s track record, click here

TipRanks highlights a cautious, yet optimistic analyst consensus surveying the tech player. Out of 20 analysts polled in the last 3 months, 12 rate a Buy on Square stock, 7 maintain a Hold, while 1 issues a Sell on the stock. The 12-month average price target stands at $46.80, marking a slight return potential of nearly 2% from where the stock is currently trading.

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