Square Inc (NYSE: SQ) stock rose 8 percent Thursday, a day after the company reported second-quarter earnings and revenue beats. Square’s impressive growth numbers won over the market, but analysts are questioning whether or not margin concerns will eventually catch up to SQ stock.
Square reported second-quarter adjusted earnings per share of 13 cents on revenue of $385 million. Both numbers exceeded consensus analyst expectations of 11 cents and $367 million, respectively.
Perhaps most importantly, revenue was up 60 percent from a year ago, putting the payment company’s growth outlook in rare company on Wall Street.
While SQ stock gained more than 6 percent on Thursday morning, analysts say the report was far from a slam dunk for Square.
Looking ahead, Square guided for third-quarter revenue of between $407 million and $412 million, well above the $379 million midpoint of the Wall Street estimate range. However, third-quarter EPS guidance was between 8 and 10 cents, missing analyst estimates of 13 cents.
Bank of America analyst Jason Kupferberg says Square delivered another quarter of impressive growth, but third-quarter margin guidance was 3.1 percent below Bank of America’s target.
“Overall, we view SQ’s results as positive and are impressed by robust growth metrics in the quarter, which continue to be best in class,” Kupferberg says.
However, by both raising full-year revenue guidance and reiterating full-year earnings before interest, taxes, depreciation and amortization guidance, Kupferberg says Square effectively lowered its EBITDA margin percentage guidance.
“We question whether the margin trajectory beyond 2018 could be similarly impacted,” he says.
Stephens analyst Brett Huff says he was also impressed by Square’s quarter but has concerns about how much upside SQ stock has remaining after it has already gained 106 percent year-to-date. Huff says Square is unique given its massive addressable market and its 50-percent-plus organic revenue growth, a rarity among large-cap stocks.
“However, while revenue growth was excellent again, SQ’s high multiple, potential market-wide tech stock value reductions, second quarter in a row lowering margin expectations, plus tougher comps coming in [the second half] give us enough pause not to recommend buying at 14 times [revenue],” Huff says.
Bank of America has…
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