Pricey Square Shares Downgraded Ahead Of Earnings

Shares of Square Inc SQ lost 3 percent early Thursday after analysts at Stifel said they're expecting downside to the stock leading into next week's earnings report.

Stifel's Scott Devitt downgraded Square's stock Wednesday from Buy to Hold and slashed his price target from $36 to $29, which implies downside from Wednesday's closing price of $36.47.

Square's status as a leader in the small- and medium-sized business services ecosystem remains unchanged, and the San Francisco company continues to do a good job in expanding its assortments, Devitt said in the downgrade note. (See Devitt's track record here.)

Square is also active in expanding its business to international markets, which implies a much larger merchant penetration, he said. 

Nevertheless, the stock's valuation needs to be taken into account, especially as it trades near its all-time highs, Devitt said. Square's stock has surged 168 percent since the start of 2017 compared to a 15-percent gain in the S&P 500 index over the same time period, according to Stifel. In addition, the stock is trading at 10x 2019 estimated revenue and 36x 2019 estimated EV/EBITDA, which happens to be the highest multiple among companies under Devitt's coveragre. This implies that Square shares already "reflect the attractive growth opportunity and potential for margin expansion," he said. 

Q3 Preview

The analyst also offered the following commentary for Square's earnings report, which is scheduled to be released after the close Wednesday, Nov. 8:

• GPV growth of 29.5 percent to $17.2 billion.
• Revenue to come in ahead of Square's guided range of $238 million to $241 million.
• Subscription and services-based revenue to rise 75 percent to $61.8 million.
• Transaction take rate of 2.83 percent.
• Adjusted EBITDA of $32.8 million.

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Photo courtesy of Square.