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Does Square's Stock Have Upside Ahead?

Daniel Sparks, The Motley Fool

Two analysts released bullish notes on Square (NYSE: SQ) this week. One pointed to the company's powerful value proposition for small and midsize businesses, and another highlighted the company's improving adjusted revenue and marketing efficacy. What's more important, both analysts think Square stock is a buy at these levels.

Here's why these analysts are advising clients to bet on Square stock.

An employee and customer interact with the two displays included with Square Register

Square Register. Image source: Square.

A powerful ecosystem

Initiating coverage on the financial-technology company's stock with an outperform rating this week, Macquarie Research analyst Gus Papageorgiou cites the strong value proposition and sticky ecosystem for small businesses as a reason the company can keep delivering strong growth.

"Square essentially becomes an [enterprise resource planning] solution for [small and midsize business] making it very difficult to displace," said Papageorgiou in a note (via Barron's) on Tuesday.

The analyst initiated coverage on the stock with a $94 12-month price target, representing 28% upside from where shares are trading at the time of this writing on Thursday.

Improving monetization

Nomura Instinet analyst Dan Dolev reiterated a buy rating for the stock, citing Square's adjusted revenue yield and improved marketing efficacy.

Square's adjusted revenue yield, Dolev explains, captures the company's ability to drive increasingly more value from its gross payment volume dollars by selling services to its customers. The metric, which is essentially the company's adjusted revenue as a percentage of total gross payment volume (GPV), has improved significantly recently. "Total adj. revenue yield has been improving rapidly," said Dolev in a note on Thursday, "growing from 1.40% of GPV in 4Q16 to 1.89% in 4Q18 even excluding benefits from [mergers and acquisitions]."

Dolev also pointed out Square's strong marketing efficacy, highlighted by a high customer self-onboarding rate of over 80%. Square CFO Amrita Ahuja confirmed during the company's most recent earnings call that making self-onboarding easy has been a priority at the company. "In terms of the dynamics underlying the business, we see really strong network effects which, when you combine that with frictionless onboarding, which the team has been very focused on, drives efficient [customer] acquisition at scale," she said.

Dolev has a $105 12-month price target on the stock, representing more than 40% upside from where shares are trading at the time of this writing on Thursday.

Square has seen extraordinary growth recently, with adjusted revenue rising 64% year over year in the fourth quarter of 2018. Subscription and services-based revenue jumped 144% year over year when including acquisitions and 112% organically.

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Daniel Sparks owns shares of Square. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.