Square Inc (NYSE:SQ) has “ambitious” plans for the new year after the company’s just-released strong fourth quarter print yesterday evening proves to a cautious analyst there is room to get less cautious on the tech player.
Canaccord analyst Michael Graham is impressed with the company’s revenue outlook, even as he spots weakness in the first quarter for 2018 EBITDA, noting that the adjusted revenue guide has outclassed Street-wide forecasts for both the first quarter as well as for 2018. This marks yet “another” standout quarterly performance of top-line gains coupled with adjusted revenue growth rising up for the third consecutive quarter to 47%. EBITDA likewise not only topped the company’s own expectations but also consensus, which lifts the full year margin up to a nice 14%. Graham especially pays attention to quarterly margins getting smaller, as implied by the first quarter EBITDA guide for 2018- but notes this stems form SQ moving forward with new products. Additionally, the company is taking in expenses from hiring in the back half of last year.
“Somewhat positively, 2018 EBITDA guidance was within a couple million of consensus, delivering on the ~500 bps annual expansion. We expect sales & marketing to be the fastest growing opex line again this year, but the company maintains that it is seeing the same (if not slightly better) payback on spend over time,” explains the analyst.
“However the company is still aggressively investing in its growth, with focus this year on omni-channel, financial services, and international opportunities. The company continues to execute impressively as it is successfully navigating its move up-market to larger merchants (take rates are stable), expanding its product suite to effectively cross-sell (subscription & services revenue growth re-accelerated), and rolling out new services that give it additional opportunities to monetize transactions (the Square Cash app is monetizing 1/3 of transactions). We continue to be impressed with the company’s performance, but would rather seek a better entry point given the very premium valuation,” Graham surmises.
In reaction, the analyst reiterates a Hold rating on SQ stock while hiking the price target from $33 to $40. However, this still implies a 13% downside from current levels. (To watch Graham’s track record, click here)
TipRanks points to Wall Street sentiment fixed on the sidelines when it comes to SQ stock’s market opportunity at hand. Out of 20 analysts polled in the last 3 months, 12 are bullish on SQ stock, 7 hedge their bets on the sidelines, while 1 runs for the hills. With a return potential of just under 2%, the stock’s consensus target price lands at $46.80.