Wedbush Stays On The Sidelines With Square, Points To Margin Expansion Concerns

While Square Inc’s SQ monetization strategies and standards for products and services are commendable, the payments company has been shifting its margin target and there is a lack of transparency into the company’s plans for balancing investments and profitability, according to Wedbush.

The Analyst

Moshe Katri maintained a Neutral rating on Square with an unchanged $75 price target.

The Thesis

Square continues to focus on monetizing its Cash App by cross-selling multiple ancillary products and services, including instant deposit, the Cash card and Cash for business and P2P, Katri said in a Monday note. (See his track record here.) 

Square reset its non-GAAP EBITDA guidance three times over the past 18 months, as the focus continues to be on investing in growth-related initiatives, the analyst said. 

A recent meeting with Square’s former global head of sales suggested the company was facing a dilemma with “finding the right balance between revenue growth, investments and profitability,” he said. 

The company’s shift to larger merchants could require incremental sales, service and support, which could impact margins, Katri said. Even now, margin expansion is “heavily weighted” toward the fourth quarter of 2019 relative to expectations, he said. 

Investors should “look for a more attractive entry point," according to Wedbush. 

Price Action

Square shares were up 0.79% at $73.10 at the time of publication Monday. 

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Photo courtesy of Square.