Square Inc. (NYSE: SQ) has been a particularly difficult stock to navigate in recent years. While it is a strong player in the mobile payments business, weak earnings and exposure to bitcoin have given investors trouble. Looking ahead, one analyst sees Square in for a big drop.
Nomura Instinet initiated Square with a Reduce rating and a $49 price target, implying downside of 21% from the most recent closing price of $62.03. Nomura’s Bill Carcache started off saying that the firm loves the innovation that Square has brought to the payments space, but he believes shares are overvalued.
Gross payment volume (GPV) is decelerating sharply, and the total addressable market may be smaller than once thought. Square’s GPV growth has decelerated by about 19 percentage points since the first quarter of 2016, and last quarter converged with PayPal’s total payment volume growth (excluding Venmo and eBay) in the mid-20% range.
Bulls will argue that deceleration is to be expected, based on the law of large numbers, but Nomura doesn’t view that as a satisfactory explanation, given that PayPal’s payment volume base is about five-to-six-times that of Square.
If Square’s total addressable market were truly as large as management asserts, Nomura doesn’t believe its GPV growth would be decelerating as rapidly as it is. The firm believes the deceleration Square is facing may be a function of increased competitive intensity as it seeks to move upmarket to serve larger merchants.
Nomura went on to say:
With payments as a gateway product for the other software and hardware services that Square sells to its merchants, it makes sense that decelerating GPV growth is also translating into decelerating revenue growth; in fact, Square’s revenue growth is decelerating at an accelerating rate. The growth in Cash App downloads is also on the verge of turning negative, suggesting that Cash App revenue growth will also decelerate…
We see evidence that the effectiveness of Square’s investment spending has been declining, with each marginal dollar of investment spending producing lower returns. The consensus expects 70bps of expansion in Square’s positive operating leverage in 2020 after 30bps of compression in 2019. With the efficacy of Square’s investment spending declining, it is difficult for us to see how the post-Caviar investment cycle will produce a margin improvement.
Shares of Square traded up about 2% at $63.31 on Friday, in a 52-week range of $49.82 to $83.20. The consensus price target is $78.88.