Analysts Stay Neutral On Square After Q2 Beat

Payments platform Square, Inc. (NYSE: SQ) beat Wall Street estimates in its second-quarter earnings report Wednesday. 

The Analysts

• Cowen analyst George Mihalos reiterated a Market Perform rating and increased the price target from $42 to $57.
• Stephens analyst Brett Huff reiterated an Equal-Weight rating and increased the price target from $65 to $68.
• William Blair analyst Robert Napoli maintained a Market Perform rating.
• Jefferies analyst John Hecht maintained a Hold rating, with a price target of $63.

The Thesis

Square reported a strong quarter of growth that transcended guidance, said Cowen's Mihalos. Revenue increased 60 percent year-over-year for the fifth year of sequential growth.

“While revenue was stronger across the board, the majority of the upside relative to our expectations was sourced from stronger Subscription and Services revenue,” Mihalos said.

In the view of Stephens' Huff, Square is "a special company with a compelling business model" and one of few large-cap stocks posting 50-percent-plus organic growth. 

The potential for marketwide value reductions in tech stocks and the consistent lowering of margin expectations are causing hesitiation on Buy recommendations for Square, the analyst said. 

Square has impressively driven new high-margin revenue streams while building what appears to be an interesting consumer payment business, said William Blair's Napoli. 

“Encouragingly, the growth of Square Capital has slowed and we believe is becoming a smaller percentage of the mix. We continue to believe Square will have relatively more negative volatility in its earnings in an economic downturn, though our fears in this regard are moderating." 

Square has several initiatives to build its presence in the financial services industry, such as the CashApp, Instant Rewards and bitcoin services, Napoli said. 

Square shares accurately reflect the balance between risk and opportunity, said Jefferies' Hecht.

“Notwithstanding the enormous opportunities, we believe that investors also need to balance this with considerations of risks — including heavy competition and high growth targets in nascent business segments which requires strong execution and continued investment," he said. 

Price Action

Square shares were rallying 6.15 percent to $70.97 at the time of publication Thursday. 

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Photo courtesy of Square.