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Friday, May 03, 2019 4:14:04 PM
By: MarketWatch | May 2, 2019
Payment-volume growth decelerated in latest quarter, a metric analysts say reflects Square’s ability to add customers
Square Inc. investors may have to adjust to a new reality.
Shares of the payments company SQ, -8.05% were down more than 8% in Thursday afternoon trading after Square beat on its financial metrics but delivered a disappointing outlook for the current period. The latest outlook, and Square’s selloff, has Bernstein analyst Harshita Rawat wondering whether the stock can “work without meaningful positive revisions,” or the sort of upbeat forecasts that helped drive shares higher in recent quarters.
The underwhelming outlook, partly driven by weaker performance within Square’s main business of payment processing, is just one of the key controversies from the company’s latest report, according to Rawat. Another is the slowdown in payment-volume growth, which came in at 26.7% in the March quarter, down from 28.3% in the December period and 29.6% in all of 2018.
“Even though [gross payment volume] has been decelerating since the IPO, the slowdown modestly accelerated this quarter (versus the last two years) and raises questions about Square’s ability to continue to meaningfully outpace the market in a fiercely competitive merchant acquiring space,” wrote Rawat, who rates the stock at market perform with an $80 target.
Though dynamics in the core transaction business may not be as robust as they once were, Rawat was encouraged by Square’s momentum with its subscription and services, writing that Cash app came in better than she expected while newer products like the Square Card for businesses and retail point-of-sale system also seemed to be performing well.
Morgan Stanley’s James Faucette summed up these trends in the title of his note to clients: “Lots of Boost, Not Enough GPV,” referring to Square’s Boost program that lets Cash app customers get discounts on coffee purchases and Chipotle Mexican Grill Inc. orders.
“While strong overall adjusted revenue growth is a positive, we prefer to see upside driven by GPV, as it continues to be the key to sustainable revenue growth longer term,” he wrote. “GPV growth is not only a driver of near-term transaction revenues, but also an indicator of Square’s ability to attract new merchants onto its platform, who may eventually engage with other parts of the ecosystem.”
Faucette has an equal-weight rating on the shares and cut his price target by a buck, to $74.
Others were more optimistic. “Although the stock traded off sharply after-market, we found many more positives than negatives including another [subscription-and-services] powered top-line beat, continued better-than-expected net take rates, and lower expenses across most categories,” wrote Buckingham Research’s Chris Brendler, who sees opportunity for volume growth to reaccelerate in the near term.
Brendler has a $100 target price on the stock and a buy rating.
Needham analyst Mayank Tandon commented that Square appeared to kick the year off “with a bang” and that the selloff in shares seemed to reflect concerns about the company’s investments in growth initiatives. “However, we believe the company’s momentum remains strong as the company continues to enhance its ecosystem offerings for [small- and medium-sized businesses] and consumers,” wrote Tandon, who has a buy rating on the stock but lowered his target to $90 from $95.
Square shares have gained 20% so far this year, while the S&P 500 SPX, -0.29% has risen 17%.
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