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

Shares of Square Inc SQ are up 77 percent since the start of 2018, which looks even more impressive on top of 2017's gain of 159 percent. Aggressive investors may want to consider "taking a break," as the stock now looks fully priced, according to Buckingham Research Group. 

The Analyst

Analyst Chris Brendler downgraded Square from Buy to Neutral with a price target lifted from $55 to $65.

The Thesis

Square's stock is now trading at a "very full" 30x Buckingham's 2021 EBITDA estimate despite continued expectations for a "super-compelling growth story" over the coming years, Brendler said in the downgrade note. (See the analyst's track record here.)

The stock's multiple at current levels warrants a closer look at its Instant Deposit business, which served as the "primary driver" of 2017's top-line growth, the analyst said.

Square's multiple implies a growing contribution from the ID business, Brendler said. Heightened competition from First Data Corp FDC and Paypal Holdings Inc PYPL should have investors concerned that Square's pricing isn't sustainable over the long-term, even among the less price-sensitive micro merchants, he said. 

Square's competitive moat remains big, but "not THAT big," the analyst said. First Data's Clover platform is on pace to overtake Square as the iPOS leader by 2020, and First Data's rival to Square's Instant Deposit offers rapid funding to clients' bank accounts for free — Paypal's fee is a flat 25 cents per transaction, Brendler said. 

Investors still have reason to "love the story," but the analyst's lifted $65 price target for the payments company implies just 3-percent potential upside.

Price Action

Square shares were up 0.79 percent at the time of publication Wednesday morning. 

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Photo courtesy of Square.