Square Inc. Slips Over Competition and Saturation Woes

Square Slips Over Competition and Saturation Woes

Analysts at Wedbush downgrade Square stock to Underperform over upcoming lockup expiration

By Mohid Ahmed on May 6, 2016 at 4:03 pm EST

Square Inc. (NYSE:SQ) stock tanked more than 16% in the after-hours of yesterday’s trade session as the company posted mixed results for the first quarter of fiscal year 2016. The financial services company generated $379.3 million in revenue and reported adjusted loss per share of 19 cents. That compares favorably to the Street’s consensus estimates of $345.6 million revenue and adjusted loss per share of 9 cents. The company’s revenue reflects an improvement of 51.4% year over year (YoY), while there is a significant YoY rise of 45% in gross payments to $10.3 billion.

Transaction costs increased up 64% YoY to $146.2 million. However, adjusted EBITDA exhibits a loss of $9 million. Square believes it will step up its revenue game in coming quarters. Its confidence is rooted in Build with Square, a developer platform it launched in March. The tool makes the Square ecosystem appeal to all kinds of sellers. Build with Square customers will also be able to benefit from services such as Square Capital, and Square Payroll.

In a letter to shareholders, Square points out that many of the company’s payment forays are gaining a lot of traction in both domestic, and international markets. It also announced an investment of $153 million in Square Capital which was generated through several advances, and loans in the quarter. According to Euromonitor, US e-commerce sales are expected to rise to $400 billion by 2018.

Analysts at Wedbush downgraded the payment service’s stock to Underperform over “upcoming lockup expiration”. For those unfamiliar with the term, the lockup of 90% of Square’s shares outstanding is scheduled to occur on 17th May and will prove to be a major catalyst for the company’s stock. The analysts went on to explain that the SMB loan broker business is a “risky growth engine;” the evidence of which is rooted in the company’s statement regarding challenging credit market conditions.

Importantly, the analysts point out that Square’s growth is expected to decelerate substantially over the next few years. This is due to competition from rivals, PayPal Here, Intuit, and other SAAS competitors. In their view, Square has a total addressable market of five million SMBs and therefore it is quite close to saturation.

For the second quarter of FY16, Square guides for adjusted revenue in the range of $151 million and $156 million, and adjusted EBITDA of negative $4 million to $0. These forecasts are also barely at par, and so Square will have to find new ways to differentiate in a way that will result in a wider total addressable market to avoid saturation woes. The analysts have cut the 12-month price target for Square stock from $11 to $9.

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