Shares of Square (SQ) were higher in morning trading after an analyst at Susquehanna upgraded the stock to Positive, citing valuation and potential for future gross payment volume growth. Meanwhile, an analyst at Nomura Instinet assumed coverage of Square with a Reduce rating vs. the firm's previous Buy rating on shares, saying he thinks shares are "overvalued."
SQUARE INVESTMENT RETURNS 'ON THE HORIZON': Susquehanna analyst James Friedman upgraded Square to Positive from Neutral and reiterated his $77 price target. In a research note to investors, Friedman said he is not making a call on the quarter, but noted the stock's underperformance, with shares down 37% from their highs, was due to valuation, decelerating margin expansion and decelerating GPV growth. "But we think the reinvestment that has muted the margin cadence may generate future GPV improvement and if so, we would expect the stock to follow," Friedman wrote. The analyst said he sees the company's return on margin reinvestment on the horizon and so raised his GPV and revenue estimates above consensus.
With Square Cash now standing on its own Friedman told investors that he believes Square is now reinvesting margins back into seller customer acquisition costs. These reinvestments, in addition to the margin from the Caviar sale, are likely to boost GPV and revenue growth in 2020 and 2021, and he expects the stock to follow.
Square is expected to report results of its third fiscal quarter on November 6.
NOMURA SAYS SQUARE 'OVERVALUED': Meanwhile, Nomura Instinet analyst Bill Carcache assumed coverage of Square with a Reduce rating and $49 price target, below the firm's prior Buy rating. Carcache, who told investors in a research note of his own that he "loves" the innovation that Square has brought to the payments space, said he believes the shares are "overvalued." While some investors view Square as a software play, several catalysts could bring its valuation more in line with payments industry peers, Carcache wrote. Square's valuation "discounts significant unrealized margin expansion, which we don't view as justified," added the analyst.
In August, Dan Dolev, the Nomura Instinet analyst who previously covered Square, said he expected a "more upbeat" quarterly report and annual guidance, but anticipated that selling Caviar would sharpen the company's focus on its core competency and growing ecosystems, and although gross payment volume failed to re-accelerate, he said that the incremental quarterly GPV dollars continued to expand. At the time, Dolev contended that seeing the forest for the trees shows that Square's results and strategic actions are "bearing significant fruit and are much more compelling than meets the eye."
PRICE ACTION: In morning trading, shares of Square are up 1.2% to $62.80.