Square Inc (NYSE:SQ) will be showing off its first-quarter earnings for 2018 come May 2nd, and top analyst Daniel Perlin at RBC Capital is exceedingly confident on the mobile payments giant ahead of its print.
Perlin expects SQ to report above his estimates of $31M and $290M in adjusted EBITDA and revenue, respectively. According to the analyst, the upside could be driven by stronger growth in the company’s higher margined subscription & services revenues, which has enabled adjusted net revenue growth to inflect up the past three quarters.
“Despite larger sellers continuing to represent the fastest growth segment, SQ’s transaction margin has remained very consistent, averaging ~1.05% for the past three years. Most recently in Q4/17, the transaction margin was 1.07%, which is what we are modeling for Q1/18. Interestingly however, when you take into account the subscription & services revenue, transaction margin has continued to expand over the last three years, growing from 1.16% in FY15 to 1.33% in FY17 and an estimated 1.39% in FY18,” Perlin wrote.
“The balancing act between growing EBITDA margins and reinvesting back into new product initiatives has been a consistent question. Thus far, the margin expansion story has been significant, roughly doubling in FY17 y/y. The question remains as to the level of reinvestment required to support all the new product initiatives SQ is bringing to the market, while at the same time expanding geographically and now through more meaningful M&A. We are forecasting $31M in adjusted EBITDA, representing an 11% margin, which we believe will prove conservative,” the analyst added.
As such, Perlin reiterates an Outperform rating on Square shares, with a price target of $53, which represents a potential upside of 12% from where the stock is currently trading.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Daniel Perlin has a yearly average return of 27.5% and a 83.5% success rate. Perlin has a 123.5% average return when recommending SQ, and is ranked #48 out of 4775 analysts.
Overall, out of the 27 analysts polled in the past 3 months, 16 rate Square stock a Buy, 9 rate the stock a Hold and 2 recommend a Sell. With a return potential of 4%, the stock’s consensus target price stands at $49.21.