Square: Lowered Q3 Estimates Don’t Invalidate the Bull Case

 Square: Lowered Q3 Estimates Don’t Invalidate the Bull Case

Payment volume statistics including those from Visa, SpendTrend and Opentable indicate a drop-off in August and possibly September. As such, RBC’s Daniel Perlin thinks Square’s (SQ) Q3 gross profit growth will be affected.

This requires a more cautious approach and has resulted in some tweaking to Q3 estimates. Based on a “2yrs stack,” Perlin now expects Cash App gross profit growth in 3Q21 (vs. 3Q19) to rise by 106%, compared to the prior 110% estimate, which will lead to segment gross profit of $525 million, as opposed to the prior forecast of $544 million.

Furthermore, to more “fully reflect” the incremental investments management highlighted in last quarter’s (Q2) earnings call, and which called for a sequential uptick of roughly $150 million in non-GAAP Opex, the analyst has also lowered the total company adj. EBITDA estimate for 3Q21. The figure now drops from $213 million to $185 million.

Taking these revisions into account, for FY21, Perlin now expects adj. EBITDA of $1.053 billion compared to $1.085 billion beforehand and Cash App gross profit of $2.15 billion vs. the prior $2.18 billion estimate.

So, a bit of bad news there. But, nevertheless, Perlin’s overall thesis for Square remains resolutely positive, particularly in light of the pending closure of the Afterpay acquisition, expected to be completed in 1Q22. Square is splashing out $29 billion on the Australian BNPL (buy now, pay later) company in a move which the analyst thinks will be beneficial for the fintech giant.

“We believe SQ’s acquisition of Afterpay will prove hugely strategic, as it represents the connective tissue to drive higher engagement between its two ecosystems (Seller & Cash App) and further differentiates itself in a crowded Fintech space,” the 5-star analyst opined.

As such, while Perlin has made some adjustments to his SQ model, the Outperform (i.e., Buy) rating stays as is and so does the $312 price target. The implication for investors? Upside of 30% from the current trading price. (To watch Perlin’s track record, click here)

Most analysts back Perlin’s assessment; based on 17 Buys vs. 4 Holds and 1 Sell, SQ stock boasts a Moderate Buy consensus rating. At $316.55, the average price target implies ~36% upside potential. (See Square stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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