Will Square's share price maintain its current valuation?
Following a Q1 2019 earnings report which failed to meet expectations, Square Incs [SQ] share price closed May on a disappointing note. At $61.95, it was down 24% from its 28 February year-to-date high of $81.24. Comparing year-on-year values, shares have remained almost static, while its all-time high of $99.01 on 24 September 2018 now feels a fairly distant memory. But despite the tumbling numbers, several analysts are still bullish on the internet companys prospects, suggesting the share price may be seriously undervalued at present. In a note to clients, Guggenheims Jeff Cantwell reiterated his buy position, saying that Squares long-term outlook is improving significantly over time, with potential for the stock to rise as much as 50%. Meanwhile, Buckingham Researchs Chris Bendler called Square his top pick by far among payment companies. Square is a tricky company to fit into any one category. Three-and-a-half years on from IPO, the fintech founded by Twitters Jack Dorsey has become a very different company: it went public as a payments processor, becoming a regular feature of retail locations with its trademark white, rectangular card readers; it has since expanded into business accounts, payroll management, money transfers and even lending. It is still loss-making, but also an early mover in the booming payments market, competing with Mastercard [MA], Worldpay [WP], PayPal [PYPL] and accounting software company Xero [XRO] at once. Where analysts and investors place Square has implications for its growth prospects. In the eyes of the market, its still very much one and the same with its core payments business: after its Q1 results showed that gross payment volume (GPV) came in short of analysts estimates, the stock fell 7.7% overnight. Market cap $26.81bn Operating margin (TTM) -0.92% EPS (TTM) -0.13 Quarterly revenue growth (YoY) 43.5%  Square share price vitals, Yahoo Finance, 05 June 2019  At $22.6bn, GPV (which shows how much cash is flowing through Squares various platforms), was a decline on the previous quarter, but still represented 27% year-on-year growth. This short-term decline, and the soft Q2 guidance which followed these results were enough to spook investors, making Bernsteins Harshita Rawat wonder if the fintech had the ability to continue to meaningfully outpace the market in a fiercely competitive merchant acquiring space.  Still, other analysts like JPMorgan and Piper Jaffray see momentum for further growth, even as profitability remains temporarily elusive, with CEO Dorsey talking up treating Squares various non-payment products as opportunities in themselves, rather than ancillary to the core payments propositions. One-stop shop  Ecosystem is the preferred way among Squares management to describe the business. Put simply, the company wants to make it possible for customers to manage their businesses entirely within the world of Square. Today, it offers a whole suite of products, allowing merchants to manage their funds through a business debit card, take care of payroll, create their own marketing programme and even set up their own website, thanks to Squares acquisition of website builder Weebly a year ago. Square has even struck a partnership with delivery startup Postmates to allow retailers to deliver purchases to clients doors in the future. All these tools reinforce one another, Dorsey said at a JPMorgan event in mid-May. And according to chief financial officer Amrita Ahuja, all these different bets have been growing just as strongly as the core payment business: 50% of revenues for the last period came from products Square launched within the past five years, she said. 50% Last period revenue from products launched in the past 5 years  Expanding that ecosystem wont come for free: while management is keen to remark that at $20 per user, acquisition of new customers is a fraction of a traditional financial services firm, margins are set to come under pressure as most extra revenues are reinvested into growing capacity. The board raised full-year revenue guidance after Q1, but kept earnings before interest tax, depreciation and amortisation (EBITDA) unchanged, which Piper Jaffray saw as indications of thinning margins. While Square wants investors to look at quarterly adjusted revenues and EPS  which benefit from the inclusion of, among other things, stock-based compensation for employees, deferred revenues and the companys stake in ticket marketplace Eventbrite  the actual bottom line remains negative: net loss actually increased some 60% year-on-year to $38m in Q1. 60% Net loss increase year-on-year  Some analysts see the stock as bloated  even for a fast-growing fintech. Valuation remains our primary investment caveat, wrote Oppenheimers Glenn Greene in the wake of results, while Raymond James John Davis added that, while there is nothing wrong, we simply think the stock is unlikely to maintain its current valuation.