Square Has New Plans and New Eyes on It
Piper Jaffray initiated coverage on mobile-payment service Square (SQ) - Get Report Thursday, with a neutral rating and $10 price target, forecasting "better-than-expected" results for 2016.
"Our bear-bull one-year valuation range is about $8-$12.50," the analysts led by Jason Deleeuw said in a Thursday report, citing hopes that Square will "evolve" its business model, which has been relatively stuck in a "secular trend of increasing payments complexity."
Most recently, the San Francisco company headed by Twitter (TWTR) - Get Report CEO Jack Dorsey announced plans to expand its merchant lending businesses, building on its cash-advance operations. Square doled out 23,000 loans and advances in the first quarter, bringing the company's total loans outstanding to "well over 100,000," Square's chief financial officer, Sarah Friar, said on this month's earnings call with analysts.
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"Impressive innovation has catapulted Square into the payments arena," the analysts said, noting that the company has introduced a slew of new players to the electronics payments ecosystem, generating $36 billion in gross payment volumes last year alone.
But Piper Jaffray tempered its fairly bullish outlook by noting that the price of innovation has been expensive, saying sales growth has outpaced the company's rate of EBITDA growth, a common valuation metric that stands for earnings before interest, taxes, depreciation and amortization.
"Also, Square has to strike the right balance between investing for growth and delivering improved profitability, as too much innovation spending pullback could result in slower revenue growth and a lower valuation multiple."
Shares of Square are down 27% so far in 2016, as of closing trading levels Thursday.
