Square stock jumped by about 4% to as high as $12.62 during regular trading hours on Monday after analysts at Pacific Crest upgraded it from Sector Weight to Overweight. They set a price target of $15 per share. Their upgrade comes a couple of weeks after the digital payments processor posted a strong earnings report.
Square set for a string of surprises
They cited their “in-depth work on payments, delivery and lending,” which they said has led them to believe that Square is on the path toward providing Wall Street “a consistent series of positive fundamental surprises over the next year.” They predict that the Street will shift its focus to cash flow and profitability, resulting in the company’s stock being re-rated to the positive.
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The Pacific Crest team said that efficiencies within payments and operating expenditures alone are enough to push the company’s fundamentals higher than what investors and analysts expect. They added that their regulation and lending checks have been positive, which is why they are even more bullish on there being strong opportunities for Square Capital in the medium term.
They were concerned when they looked more closely into the Caviar food delivery service, which Square acquired about two years ago, but they see it as less of a drag. They believe that the company could boost its EBITDA if it would exit the business.
Goldman Sachs also likes Square stock
Pacific Crest’s $15 price target on Square stock puts the firm in line with analysts at Goldman Sachs. Analyst James Schneider hosted meetings with Square Chief Financial Officer Sarah Friar in London last week. One of his takeaways from the meetings was that the company is still expanding its focus from micro-merchants into bigger merchants, which made up 43% of its gross purchase volume in the third quarter. The company believes it can compete among merchants with volumes of up to about $20 million, although it understands that software and custom pricing is needed to reach a strong penetration rate.
Schneider also talked up Square Capital, noting that it is still gaining traction and has so far placed more than $1 billion in loans with an average loan size of around $6,000. The lending arm’s upper range of penetration rate is also at ten times current levels, and it has kept its loss rates at less than 4% as it experiments with loan sizes of up to $100,000.
The company has also been working on improving its point of sale software, adding ERP capability, and Schneider believes it might launch some specialized products for restaurants, retailers and health/ beauty merchants next year. He noted that the newest upgrade for Square Cash now enables users to store their P2P cash balances or cash them out to a virtual Visa card to use online or with Apple Pay.