4 Reasons Square's Impressive Year Will Continue

Square Inc. SQ — the maker of a point-of-sale app that can be used with Apple Inc. AAPL iPhones and iPads — is a top pick in the payment space, according to Citi.

Square’s second-quarter performance is up 70 percent and shares are likely to gain more, analyst Peter Christiansen said in a Wednesday note. Citi maintains a Buy on Square and raised its target price from $23 to $30 (check out Christiansen's track record here).

4 Justifications

Here are four reasons why Christiansen said Square is an attractive tech name:

1. Investors and Square skeptics now understand the San Francisco-based company better after its “strong” May 16 investor day, Christiansen said.

2. Square has shown “strong” year-over-year growth, margin expansion and “solid, but beatable guidance,” Christiansen said. Investors are recognizing an increased rate of innovation at the company, the analyst said.

3. Citi projects mid-single digit EBITDA margin expansion into 2018 and raised its 2018 EBITDA margin assumption from 16 percent to 18.7 percent.

“The company is extending the use of its machine learning [and] automation capabilities outside of risk to improve operational efficiency, while last quarter’s results provided solid evidence that more sellers are extending their usage of the ecosystem,” Christiansen said.

These projections could be “overly conservative” due to Square’s increasing scale, new products and international growth, according to Citi.

4. Square’s valuation is reasonable, Christiansen said. If the company continues to outperform expectations in the coming quarters, the perspective of long-term investors could change, “rippling to sharp upward revisions,” the analyst said.

“In our experience, stocks of companies that are beginning to scale into profitability have often been strong performers.”

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Jack Dorsey's Top Priorities For Square _______ Image Credit: By Mybloodtypeiscoffee (Own work) [CC BY 4.0 (http://creativecommons.org/licenses/by/4.0)], via Wikimedia Commons