Craig-Hallum No Longer A Square Bear, Says Risks Priced Into Stock

The bearish case for Square Inc SQ can no longer be justified, as the stock's decline since its 2018 peak now reflects multiple concerns, according to Craig-Hallum.

The Analyst

Bradley Berning upgraded Square's stock rating from Sell to Hold with a price target lifted from $55 to $63.

The Thesis

Square's stock traded above $100 per share in late 2018, but its current valuation near $60 per share factors in multiple headwinds, Berning said in a Wednesday upgrade note.

The headwinds include the following, the analyst said: 

• Decelerated revenue due to growing competition.
• A push to boost margins that has come at the expense of seller transaction growth.
• Seller margin expansion was used to finance CashApp growth and drive EBITDA margins, which resulted in decelerating revenue growth in transaction volumes.

The company's own comments at a recent conference "clearly signaled" it plans on overseeing new investments to drive growth, he said.

For example, hardware costs were lowered by 20%, and online and brand investments from the second quarter are likely to be recurring in nature.

Craig-Hallum is now modeling for Square to invest 2.7% to 3.7% of revenue in incremental spending, with adjusted EBITDA will likely expanding 1.65% in 2020.

The stock's valuation isn't compelling enough to recommend investors pull the trigger and be buyers of the stock, Berning said. 

Price Action

Square shares were down 0.3% at $59.38 at the time of publication Wednesday. 

Related Links:

Canaccord Genuity Upgrades PayPal, Downgrades Square

Bank Of America Cuts Square Target Due To Questions About 2020 Guidance

Photo courtesy of Square.