Will Square’s share price keep climbing after analyst turnaround?

Raymond James analyst John Davis abandoned his bearish outlook on Square [SQ] last Monday to tell traders to go long on the stock. According to Davis, Square’s growth story is ‘far from over’. The turnaround was enough to send Square's share price 6% higher on the day. 

Why Davis changed his mind on Square’s share price?

Davis upgraded his rating on the stock from “Underperform” to “Market perform”. In his reassessment, the analyst said that the stock now offered a more balanced risk profile. He also said Square's business-to-business card, Square Card, was 'gaining traction' and could provide momentum for the company to beat targets in the second half of the year.

“We are upgrading Square to Market Perform from Underperform as our short thesis from the end of Jan has mostly played out and we now believe the risk/reward is more balanced. Specifically, we had concerns that the magnitude of the top-line beats would likely wane, and more importantly, the deceleration in 2Q19 organic growth could catch some investors by surprise,” said Davis in a note to investors.

How has Square’s share price performed recently?

Davis’s change of heart adds to the momentum that has seen Square’s share price gain 17% since 3 June, and 11% this year. However, these gains pale next to PayPal’s [PYPL] 42% and Visa’s [V] 35% over the course of 2019.

May was tricky for Square when Q2 revenue guidance disappointed investors for the second quarter in a row. Guidance for Q2 came in at $545 million to $555 million compared to the $556.6 million analysts had forecast. This was enough of a miss to send the stock down 7% in after-hours trading. CEO Jack Dorsey pinned the conservative guidance on the disappointing performance of acquisition Eventbrite. 

What are Square’s growth drivers?

Square is targeting full year revenues $2.28 billion for 2019, which would be a 43% increase on last year’s revenues. EBITA is forecast to come in at $415 million, which would be a 2% gain.

To get there, analysts expect Square Card to play a big part. The card, launched six months ago, allows businesses to withdraw money through Square payments. According to Buckingham Research Analyst Chris Brendler, the new product has already had a high take up rate and could possibly add a 12% ‘tailwind’ to Square’s 2021 revenues:
 
"[Total Payment Volume] is already over 20%, we think this is much higher than anyone expected and our analysis suggests huge upside potential.”

Square's Cash app is also pulling ahead of PayPal-owned Venmo, according to research from Instinet. Square has registered 56.1 million cumulative downloads of the app, 6.4 million more than Venmo as of June. 

The research revealed that those on lower incomes (defined as any one on under $50k) were using Square's app in the same way they’d use a prepaid credit card. Instinet thinks the potential market for Square using the app in this way could be up to 50 million users.

Internationally, a partnership with Sumitomo Mitsui Banking Corporation [SMFG] in Japan could also boost the stock. With the Japanese bank distributing Square’s reader in all of its branches, the company’s presence in the country is growing and looks likely to add to revenues this year.

Square share price vitals, Yahoo Finance, 15 July 2019

Is Square a buy?

Raymond James aren’t the only ones liking Square right now. Argus started coverage of the stock with a "Buy" rating last week, while J.P. Morgan think Square could drive the growth needed to justify its high valuation. The stock carries a 69.97 forward P/E, which is higher than both Visa’s 28.87 and Paypal’s 33.99.

Among analysts, the average price target is $82.10, which would represent a 5% upside if hit. Of the 31 analysts following the stock on Yahoo Finance, 17 rate Square either a "Strong Buy" or "Buy". The rest rate the stock as "Hold". 

In his analysis, Davis pinned a price target of $94 on Square. This would represent an 18% upside on the current share price. Whether Davis is right or if the average among his peers is closer to the mark will depend on how much revenue Square can bring in during the second half of 2019.