Square stock moved higher on Friday following a major upgrade from analysts at Deutsche Bank, who said the company is “beginning to shine.” Analyst Bryan Keane upgraded Square stock from Hold to Buy and set a $17 price target. He feels the payment processing company’s business model is “underappreciated” and that the company is in a good position to be able to take advantage of several positive trends in the industry.
Deutsche Bank’s upgrade comes only a few weeks after another major upgrade from Pacific Crest analysts, who upgraded Square stock to Overweight.
Square stock gets a Buy rating
In a research note dated Dec. 1, Keane said Square is well-positioned to benefit from trends such as growth in micro and small businesses and electronic payments. He also said the company should benefit from the ongoing shift toward integrated solutions, as he notes that the company owns its own platform. He believes this enables it to attract and also keep clients better than its peers in the industry, noting that high retention and low churn rates builds a moat around a business.
He added that Square currently stands at a key inflection point because it’s pivoting toward profitability while also maintaining a growth rate that leads its industry. In fact, the Deutsche Bank analyst feels that Square’s fourth quarter guidance and also consensus estimates for fiscal 2017 and 2017 could end up being conservative. Indeed, this is one company that’s earning praise from more and more analysts these days.
Square may deliver more than the Street expects
According to Keane, Square stock is “mispriced” because it trades at only 3.5 times calendar year 2018 EV/ adjusted sales. He believes a valuation of 5 times EV/ adjusted sales on 2018 estimates is appropriate because of the valuations granted to the company’s peers with similar profiles in terms of growth.
He adds that Square’s “platform approach” offers a solution that is different from those of its peers because it is integrated. Further, he said it “helps deliver positive volumes and revenue from its existing seller cohorts.” Other acquirers, however, experience dollar churn in their bases.
He also added that Square has been adding about 100,000 sellers per quarter and notes that it also offers more software and services, beyond what the company’s competitors offer. Keane notes that the Software and Data segment grew 140% year over year in the third quarter and has been seeing accelerated growth though offerings such as Capital, Instant Deposit and Payroll are already in their early maturity stages.
Square’s momentum to continue
The analyst feels that the company has demonstrated that its business model can be scaled and also quite profitable, as its EBITDA margin expanded from being in the negative to +7% in the third quarter, marking an improvement of 20 points year over year. He expects Square to continue improving its margins as it moves toward its long-term target of 35% to 40%. He also expects the company to continue showing momentum as profitability keeps improving.
Shares of Square stock rose by as much as 2.83% to $13.08 during regular trading hours on Friday.
