Square Inc. was a bright spot in 2018, with its shares climbing more than 60% amid a down year for the overall market. But one analyst is betting that the party is now over.
Raymond James analyst John Davis cut his rating on Square shares
to underperform from market perform on Tuesday, writing that he doesn’t see any clear growth drivers on the horizon like the company’s Instant Deposit product, which boosted the company’s fast-growing subscription-and-services business last year. “Revenue upside [is] likely to prove more difficult,” Davis said.
He argued that Square’s organic growth may have peaked in the third quarter, and he expects that the company’s services segment will “meaningfully decelerate” in the year ahead once the company starts lapping its acquisitions of Weebly and Zesty, two slower-growing businesses.
Square shares are down 9% in Tuesday morning trading.
Davis said that Square investors could start focusing more on the company’s margins amid limited potential for revenue upside. While consensus expectations around 2019 margins seem potentially conservative in his view, the 2020 assumptions look “aggressive,” with analysts calling for a margin of about 22% on the company’s earnings before interest, taxes, depreciation and amortization (Ebitda). Davis projects a 2020 Ebitda margin in the range of 20% to 21%.
He’s also concerned about Square’s application for an industrial-loan charter, which would enhance the company’s ability to offer bank-like products. Approval for the charter “would undoubtedly bring additional revenue opportunities,” Davis wrote, but he said that greater exposure to lending products also carries more risk, especially “late in the credit cycle.”
Of the 37 analysts tracked by FactSet who cover Square, 18 have buy ratings, 16 have hold ratings, and three have sell ratings. The average price target is $79.97, 13% above current levels.
Despite the share-price decline on Tuesday, Square’s stock is still solidly in positive territory over the past month, up 25%. The S&P 500
has gained 6% in that time.