Square stock surged by as much as 5.5% on Tuesday following a huge upgrade from analysts at Stifel, climbing as high as $12.54 per share. If the shares keep heading steadily upward, they could approach the 52-week high of $15.91. The question now is whether Jack Dorsey’s “other” company can do better than Twitter has done.

square logo2

Square upgraded to Buy

Stifel analyst Scott Devitt and team upgraded Square from Hold to Buy and set their target price at $15 per share. Their upgrade comes less than a month after the company received price target increases from multiple firms within a small window of time. They said they’ve become “more comfortable with the key debates surrounding the stock” following three quarters as a public company with “consistent execution across the top and bottom-line.” In their upgrade report dated August 22, they revisited the three debates they highlighted in their initiation note some time ago.

One of the debates is whether the growth of Square’s core business is sustainable, but Devitt and team noted that the digital payments platform has beat top-line growth estimates despite concerns about competition and the size of the addressable market. They believe the company will keep executing well on the top line as it extends its product and services offerings, which will widen its total addressable market. They also expect Square’s momentum to continue as bigger merchants adopt its platform as a payment option. Further, they expect the company to benefit from the tailwinds caused by the shifts toward electronic payments and EMV.

Square’s supportive businesses will keep expanding

The Stifel team also addressed concerns about just how large the company’s ancillary businesses will be able to get, noting that Square’s software services business expanded to 7.3% of its adjusted net revenue in the second quarter. In last year’s third quarter, the business was 4.9% of adjusted net revenues. Further, they pointed out that Square Capital is picking up steam and has since expanded off the platform by partnering with Upserve.

Square has also been busily adding other software services, like invoices, instant deposits and CRM, which Devitt and team said has seen strong attach rates. The company also added an open API and app store that provides merchants with access to services it doesn’t directly offer. The Stifel team said because of the positive trends within these supportive businesses, they’ve become more constructive on the company’s ability to continue on the same trajectory due to the growing mix of larger merchants and higher attach rates and its growing capital business. They particularly mentioned the uniqueness of the capital business because it uses a “payback structure that offers Square greater visibility.”

Square attracts more and more large merchants

They noted that large merchants with more than $500,000 in annual GPV now make up 14% of Square’s gross payment volume, compared to only 6% of it in the first quarter of 2014. This means an 80% year over year growth rate. At first, they were concerned about whether Square would be able to move up the market as competition from merchant acquirers and competing POS systems grows, but they note that the company’s recent results show that it is able to gain share among bigger merchants.

They believe the momentum in this area can continue through “a deeper set of services and more targeted marketing efforts” toward them.

Tags: