It's Hip To Be Square: Credit Suisse Double Upgrades, Morgan Stanley Lifts Price Target

Square Inc SQ received some support from Street analysts Thursday as Credit Suisse turned bullish on the stock and Morgan Stanley lifted its price target.

The Analysts

• Credit Suisse's Paul Condra upgraded Square from Neutral to Outperform with a price target lifted from $44 to $81.
• Morgan Stanley's James Faucette maintains an Equal-weight on Square with a price target lifted from $43 to $75.

Credit Suisse: 'Humble Beginnings' A Thing Of The Past

Square's "humble beginnings" as a mere facilitator of payments for small- and medium-sized businesses has notably evolved for the better since its 2015 initial public offering, Condra said in the initiation note. (See the analyst's track record here.) 

The company now offers multiple vertically focused point-of-sale software offerings, a marketplace for third-party applications, hardware products and complementary services like gift card facilitation, invoicing, CRM solutions, analytics and payroll, according to Credit Suisse. 

Square's evolution implies it can control a much larger potion of the estimated $2.8-trillion global SMB payment volume by 2028, Condra said. Square could oversee total volume of $538 billion in 10 years, which would generate $26 billion in potential revenue, he said. Potential upside to these figures could be realized if Square expands its business to target larger merchants and increases its online penetration, the analyst said. 

Square's Cash App has quietly become one of the most-downloaded financial apps and boasts an installed base of roughly 31 million users, Condra said. Square monetizes the platform in multiple ways, and it's driving "significant" growth to the tune of $108 million in total subscription and services revenue, he said. 

Square's management philosophy encourages a "fair degree" of risk-taking and the accepting of multiple new projects at the same time, Condra said. This attitude, coupled with a willingness to invest in "bleeding edge technology" like artificial intelligence and cryptocurrenties, has resulted in the company being able to attract and maintain the necessary talent needed to drive innovation, he said. 

Related Link: A Square Bull Turns Neutral After 77% Gain In 2018, Increased Competition

Morgan Stanley: 3 New Developments

The case for downside to Square's stock can no longer be justified after three key developments now suggest upside to the stock, Faucette said in a research report. (See the analyst's track record here.)

• Square has a sustainable advantage in data collection and analytics through new product launches, Faucette said. The potential to monetize its data and create compelling new products and services represents a significant potential that didn't exist in the past, he said. 
• Square's likelihood of being labeled an Industrial Loan Company by the U.S. FDIC are now better than previously expected, the analyst said. If Square receives the designation by 2019, it would account for a $95-million annual revenue lift in 2020 and hen grow at a compounded annual growth rate of 32 percent, Faucette said. 
• An unfavorable culture shift at rival financial institutions like First Data Corp FDC creates an opportunity for Square to capitalize on, the analyst said. Put in perspective, each percentage point of market share Square can capture from First Data and its JV channel would account for 1 percent in incremental revenue, he said. 

Price Action

Shares of Square hit a new all-time high Thursday morning at $70.76 and were higher by 3.45 percent on the day at the time of publication. 

Related Link: Morgan Stanley: Paypal-iZettle Deal Presents A Challenge To Square

Photo courtesy of Square.