BTIG Upgrades Square To Buy: 'Growth And Profitability Shine Through'

BTIG’s Mark Palmer believes Square Inc SQ's “growth and profitability shine through” the company’s fourth-quarter 2016 results.

The analyst upgraded the rating on the company from Neutral to Buy, with a price target of $20.

Profitable Growth

“While we had been impressed by SQ’s answers to questions about its ability to post profitable growth during the past couple of quarters, the company found another gear during 4Q16. Given this confirmation of an upturn in the trajectory of SQ’s profitable growth, we believe a fuller valuation is merited,” Palmer stated.

The analyst mentioned that Square reported “emphatic outperformance” in each metric for the fourth-quarter 2016, with adjusted EBITDA rising 150 percent sequentially, well ahead of the consensus and the estimate.

The adjusted EBITDA margin of 16 percent reflected improvement of 20 points from the same period a year ago, benefiting from operating leverage and growth in the higher margin services.

Square reported its adjusted revenue for the quarter at $192 million, representing 43 percent year-over-year growth, beating the consensus and the estimate.

In addition, the gross payment value came in at $13.7 billion, representing an increase of 34 percent over the same period in 2015 and once again beating the consensus expectations.

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Sustained Growth

“We have noted the importance of SQ’s Software and Data Products segment to the sustained growth of the company’s profitability, as businesses such as Square Capital, Caviar and Instant Deposit feature higher margins and their revenues are more recurring in nature than those of its core payments business,” Palmer pointed out.

The analyst noted that the metric that has been renamed “subscription and services-based revenue” continued its robust growth in the fourth-quarter 2016, generating $41 million in revenue, representing 17 percent sequential and 81 percent year-over-year growth.