One of the market's biggest gainers since the start of last year may be too hot for some Wall Street pros. Analysts at Jefferies and Oppenheimer assumed coverage of Square (SQ 1.18%) on Tuesday with what is basically a downgrade on both fronts. Also, Jason Deleeuw at Piper Jaffray boosted his price target on Square, but he's sticking to his neutral rating on the stock.
Shares of the mobile payments provider nearly tripled last year and have more than doubled in 2018. But Square's heady run finds analysts in a tough spot. Square's fundamentals are certainly improving, but the stock's torrid run is based more on speculative advances in crypto that may not justify the stock's monster rally (it has soared 388% since the end of 2016).
Image source: Square.
Square dancing
John Hecht at Jefferies is assuming coverage of Square with a hold rating, a downgrade from his earlier buy call. He's increasing his price target from $60 to $63. But with the shares rising a lot more than that -- the stock was well below $60 at the time of his initial bullish call and is now trading just above his new goal -- Hecht has no choice but to soften his enthusiasm on Square as an investment. He's still jazzed about Square's present situation, but the valuation concerns are proving to be too much. He also sees some competitive risks in some of Square's businesses.
Glenn Greene at Oppenheimer is in a similar boat, assuming coverage with a neutral perform rating, a downgrade from his former outperform call. He stands by Square's growth prospects as a company. But with the valuation seemingly ahead of his 30% to 55% top-line and EBITDA growth estimates, he believes that a more cautious stance on Square as an investment is in order.
Piper Jaffray's Deleeuw is the one analyst who isn't effectively downgrading the stock. But despite jacking up his price target from $49 to $63, he has no choice but to stick to his neutral rating. He's updating his model to account for Square's recent financing move and its springtime deal to acquire website builder Weebly. He concedes that the valuation isn't easy to stomach at current levels (hence the neutral rating), but he's encouraged by the momentum of Square's top-line growth.
Square is certainly gaining steam. Revenue growth has accelerated in each of the past five quarters, and that's the kind of momentum that investors like to see heading into the next financial report in three weeks. Wall Street is holding out for 53% in revenue growth, stretching its impressive streak to six quarters of accelerating gains.
The stock's spectacular run may have started last year when Square became an early adopter of cryptocurrency as bitcoin was all the rave. But now we're seeing the payments processor rolling on its own merits. The problem for investors is that the earned rally that is now compounding the speculative rally finds the stock at levels that are giving more than a few Wall Street pros cold feet.
Square has climbed this wall of worry before, but the higher it gets, the harder it will be to scale once revenue growth stops accelerating.
