Square shares pop after analyst says it's similar to 'Amazon or Google in their early days'

• Shares of payment company Square rally after a Nomura Instinet analyst forecast a 59 percent rise in the stock this year.
• "Square is likely to be a very different company helped by accelerating share gains from payment peers," analyst Dan Dolev says.

Jan. 19, 2018

Payment company Square is "analogous to Amazon or Google in their early days" but Wall Street is valuing the stock all wrong, according to Nomura Instinet

The firm reiterated its buy rating on the company's stock on Friday, calling big gains in 2018 as the company disrupts the payments industry.

The San Francisco-based company's climb to fame is a result of its financial transaction technology, enabling small businesses to accept card payments through its software and hardware products. It also developed Square Cash, a means of sending and receiving money between individuals and businesses akin to PayPal's Venmo.

"In 10 years, Square is likely to be a very different company helped by accelerating share gains from payment peers and relentless disruption of services like payroll and HR," analyst Dan Dolev wrote in a note to clients. Valuation should include "mix shift to large sellers, accelerating share gains, growing penetration of higher priced transaction types like virtual terminal and e-commerce, as well as high margin services like Square Capital and payroll."

In all, added Dolev, a surge in gross payment volume — a key industry metric — should help ensure Square has another "phenomenal year."

The analyst's $64 price target represents 59 percent upside from Thursday's close over the next year, the highest target on Wall Street according to FactSet data. Shares rallied 4.8 percent Friday morning.

Dolev believes his peers on Wall Street don't see this bright future for Square because they are using "conventional valuation methodologies." The analyst is using a discounted cash flow model to come up with his target.

Square shares are up 173 percent over the past 12 months.

The company topped Wall Street expectations in its latest earnings report and CEO Jack Dorsey, who also leads social media site Twitter, told investors that Square's growth runway looks strong.

"As we continue to grow up-market, we've learned that more complex sellers often have established systems that they've tailored to their businesses, such as e-commerce websites, custom points of sale, or inventory software," he said during the earnings call. "With our open platform, developers can connect these systems with Square and give sellers the ability to manage them in one place."

Tuesday’s earnings report marks the first since Square announced bitcoin capabilities on the platform, and questions could include whether letting users invest in a volatile cryptocurrency poses financial risk to Square, as well as how the company has sought to make money off of the practice.

More broadly, the Square Cash platform, where the bitcoin-buying takes place, remains an interesting aspect of the company’s business. Square Cash draws comparisons to PayPal Holdings Inc.’s Venmo as well as Zelle, a competing platform recently rolled out by the big banks.

KeyBanc Capital Markets analyst Josh Beck told MarketWatch last week that the bitcoin option has helped generate interest in the Square Cash platform, which is important given the competitive landscape for peer-to-peer products. “Square Cash doesn’t have the press or buzz of Venmo or Zelle, but it’s monetizing more of its transactions, at least on a percentage basis,” he said. Beck, who rates Square a buy with a $52 target, estimates that Square Cash monetizes about a third of its transactions.

Though the company has highlighted solid growth for Square Cash recently, the financials for the current quarter are likely to be determined more by core businesses, including payment processing and business services for sellers.

Earnings: Analysts tracked by FactSet estimate that Square earned 7 cents per share on an adjusted basis, whereas it reported a 4-cent net loss a year earlier. According to Estimize, the average projection calls for 8 cents.

Revenue: Analysts tracked by FactSet estimate that Square generated $601 million in revenue during the quarter, while the Estimize consensus calls for revenue of $608 million. Square reported revenue of $452 million in the prior December quarter.


What else to watch for:

Helping fuel Square’s rapid growth lately has been the company’s ability to attract larger sellers to its service. Payment volume from sellers who do more than $500,000 in annual business grew 64% year-over-year in the third quarter, accelerating versus the prior quarter. It will be worth watching whether Square can continue that trend. Late last year the company launched the Square Register, an all-in-one point-of-sale system aimed at larger sellers, and Square will likely comment on how demand for it has played out.

Square sells add-on services to businesses that use it for payment processing, and these have also been key to driving growth. The company has seen momentum with its Square Capital lending business and is trying to get a bank charter so that it can be more involved in the process of issuing loans to customers. Other services, such as instant deposits and payroll, have also caught on nicely. The subscription and services business expanded by 84% in the third quarter and investors will be looking for whether Square can keep up that fast growth rate.

KeyBanc’s Beck highlights the company’s international efforts as an area of focus as well. Square’s expansion into Canada, Japan, Australia and the U.K. is still “in the early stages,” he told MarketWatch. “In the U.K. they haven’t really put their foot on the gas from a marketing perspective, but over time that could be really material.”

To out shareholders:

We accelerated top-line growth at significant scale in the fourth quarter of 2017. Total net revenue was $616 million, up 36% year over year, and Adjusted Revenue was $283 million, up 47% year over year. This is an increase from the third quarter of 2017, when total net revenue and Adjusted Revenue grew 33% and 45%, respectively, year over year. Gross Payment Volume (GPV) was $17.9 billion, up 31% year over year. We continue to see strength in larger sellers, with GPV from this segment growing 44% year over year and representing 47% of total GPV. Net loss in the fourth quarter was $16 million, essentially flat on a year-over-year basis. We achieved fourth-quarter Adjusted EBITDA of $41 million, representing an improvement of $11 million year over year and an Adjusted EBITDA margin of 15%.

Our 2017 results set the stage for strong momentum in 2018. Three focus areas will drive our strategy and investment this year: omnichannel commerce, financial services, and current international markets. These areas provide meaningful value to sellers and individuals and significantly increase the addressable market opportunity for Square.

• Strengthen omnichannel commerce: We are enabling sellers to engage with buyers wherever they are, which includes in person, messaging channels, websites and apps, and digital marketplaces.
• Expand financial services: We have an opportunity to provide more financial services to sellers and individuals, particularly those who have been underserved by the traditional financial system.
• Grow current international markets: We will focus our international efforts this year on gaining share in our current markets of Australia, Canada, Japan, and the UK. We will strengthen our go-to-market strategy, improve automated onboarding, and expand our overall product offering.

We continue to create meaningful vectors of growth: In the fourth quarter of 2017, revenue from products launched since 2014 was 22% of total net revenue and 36% of Adjusted Revenue, up from 14% and 25%, respectively, in the prior year period.

What is a 'Cup and Handle'

A cup and handle pattern on bar charts resembles its namesake, a cup with a handle. The cup is shaped as a "U" and the handle has a slight downward drift. The right-hand side of the pattern typically has low trading volume, and may be as short as seven weeks or as long as 65 weeks.

Square Projects Profit That May Miss Estimates on Expense Growth

May 2, 2018

Square Inc. projected profit in the current quarter that may fall short of analysts estimates, suggesting investors are concerned by the pace of spending as the company expands into new lines of business.

Earnings, excluding some items, will be 9 cents to 11 cents per share in the second quarter, San Francisco-based Square said Wednesday in a statement. Analysts estimated 12 cents per share. Operating expenses gained 47 percent to $276 million in the first quarter.

The results may damp investor confidence that Square has matured from a credit-card processor for street merchants to a provider of data and services such as accounting, bookkeeping and inventory management that lets retailers with multiple stores run their operations more efficiently. Shares declined as much as 7.5 percent in extended trading after closing at $48.66 in New York.

Square’s shares have rallied 40 percent this year, as investors have grown confident in the company’s products that tie together merchants’ hardware and software needs. Its ancillary products like providing loans, food delivery, accounting, and inventory tracking are contributing to a growing share of revenue. Square agreed to buy website builder Weebly last month for $365 million in its biggest acquisition yet, giving the company another recurring revenue stream and base of new customers. The deal will help Square “become more deeply embedded in the blurring lines between physical, e-commerce, and mobile apps,” Josh Beck, an analyst at Keybanc Capital Markets Inc., wrote in a note to investors.

Adjusted revenue rose 51 percent to $307 million in the first quarter, the company said. Analysts, on average, projected $293.7 million. It was the 10th consecutive quarter that Square topped analysts’ sales estimates. The company processed $17.8 billion in gross payment volume, an increase of 31 percent from a year earlier.

The payments company said it will continue to reinvest in its business, focusing on revenue growth over profit expansion.

"Given the significant market opportunity ahead of us, we will continue to reinvest in our business to drive future growth," it said in a statement.

Gross payment volume grew 31 percent to $17.8 billion for the quarter. That's consistent with the growth rate seen in the fourth quarter.

Square continued to see momentum among the larger seller segment, or those who sell more than $125,000 through Square. Larger sellers accounted for 47 percent of total users, up from 42 percent last year. Revenue from larger sellers also jumped 47 percent from the previous year.

The company also disclosed that it generated $34 million from bitcoin. Square launched a new bitcoin transaction service through its Cash App in January.

Square launches a service to run restaurant operations, and suddenly its 'Caviar' acquisition makes sense

May 8, 2018

Payments processor Square said Tuesday it is launching Square for Restaurants, a software platform for restaurant operations designed to bring more small businesses into the Square ecosystem.

The software — which Square calls its most sophisticated software yet — ties together in one place all of a restaurant's operations, from booking tables to managing the after-meal check.

And with the launch, the company's 2014 acquisition of on-demand food-delivery business, Caviar, finally makes sense.

Not only does it integrate Caviar — a food delivery service — into the restaurant's system, but it provides Square an opportunity to sell other products — like loan packages and accounting software.

Square has long faced questions about Caviar, which it bought for a reported $90 million.

Square successfully grew its business through payments and hardware. Takeout food delivery is a capital-intensive business that has attracted such players as Uber and Amazon, with far bigger driver networks and logistics experience. Some investors and analysts have questioned Caviar's strategic position within Square.

In recent years, Square has been moving beyond hardware and deeper into financial services, even applying for a banking license. Square Capital — its loan platform for vendors — has become a contributor to the overall business and, according to management, drives greater merchant engagement across the entire Square ecosystem.

Caviar has also been a way for the company to further integrate small businesses into its growing ecosystem. In the company's 2017 shareholder letter, CEO Jack Dorsey wrote: "Square's expertise in point of sale, order management, and services ... help sellers grow differentiates Caviar from food delivery services."

Now, Square is making it official with a dedicated platform that aims to be the only software restaurants need. Square says the software has the ability to update menus and floor layouts remotely while also offering performance tracking, tip splitting and fraud protection.

Square for Restaurants is the company's third point of-sale-offering, joining Square for Retail and Square Appointments for service-based businesses.

Square, Inc. (“Square”) (SQ) today announced its intention to offer, subject to market conditions and other factors, $750 million aggregate principal amount of convertible senior notes due in 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Act”). Square also expects to grant the initial purchaser of the Notes a 30-day option to purchase up to an additional $112.5 million aggregate principal amount of the Notes solely to cover over-allotments, if any.

Square is rallying after obtaining a bitcoin license in New York (SQ)

Shares of Square spiked about 1.3% Monday morning after the company said it had obtained a New York State license to let customers buy and sell bitcoin through its Cash app.

The payments company, founded by Twitter CEO Jack Dorsey in 2009, has supported bitcoin since January, when it first launched support for the cryptocurrency in certain states. Square is the ninth firm to receive a "bitlicense" from New York's department of financial services, Reuters reported.

"We are thrilled to now provide New Yorkers with Cash App’s quick and simple way to buy and sell bitcoin,” Brian Grassadonia, Square's head of Cash App, said in a press release. “Square and the NYDFS share a vision of empowering people with greater access to the financial system and today’s news is an important step in realizing that goal.”

So far, Square's venture into crypto seems to be working out. In its most recent earnings report in May, the company said it made a $200,000 profit from bitcoin in the first quarter thanks to price fluctuations from the volatile cryptocurrency.

Today's announcement is just another step forward in Square's fight against Venmo to be the go-to payments app, one Wall Street analyst told Business Insider.

"Something like this could accelerate the pace of downloads and let the Cash app be more entrenched," Dan Dolev, an analyst at Nomura Instinet, said in a phone interview. "It's a win-win and another positive step forward for Square."

Shares of Square are up 80.5% this year.

Square: Why These Bulls Love the Cash App

Square Cash, the company’s digital wallet app, could be worth $20 a share by itself.

The app is evolving from a money transfer tool “into a full-fledged financial service offering,” KeyBanc analysts wrote Monday. “Successful P2P products produce virality-driven network effects and for companies like Square can create a valuable consumer franchise that can be monetized via adjacent services.”

The analysts, who have an “overweight” rating on the Barron’s Next 50 company’s shares, set a $70 price target on the stock. That represents a nearly 8% premium to current prices and is Wall Street’s highest—well above FactSet’s mean of approximately $53.

Their analysis is based on an increase in gross Cash payment volume from about $9.2 billion last year to more than $54 billion in fiscal 2022—which would represent a leap in revenue to $450 million from $69 million—as users and engagement grow.

In the near term, KeyBanc is boosting its 2019 revenue estimate based on expected growth in Cash-related business, less “increased investment to support the scaling of Square Cash including awareness building, product enhancement and loyalty efforts.”

We covered signs that downloads of Cash were accelerating relative to those of PayPal-owned (PYPL) Venmo in May. A few days later, we discussed the possibility that the company might use recently acquired funds to boost acquisitions.