Bullish KeyBanc Says Square's Macro Risks Can Be Overcome

Although Square Inc SQ faces macro headwinds, they could be offset by company-specific factors and do not impact 2019 gross payment volume projections, according to KeyBanc Capital Markets.

The Analyst

Analyst Josh Beck maintains an Overweight rating on Square with an unchanged $115 price target. 

The Thesis

Failure rates increased during the last recession, but could be easily offset by an increased large-merchant mix, Beck said in a Tuesday note. 

During the last recession, GDP was down 5 percent, resulting in a 270-basis point increase in failure rates among businesses with four or less employees, the analyst said. A correlation analysis indicates that while failure rates could increase by around 50 bps with a 120 bps decline in GDP for companies with zero to four employees, failure rates decline by 60 percent with an increase in average employee size to five to nine employees.

The decline in formation rates could be offset by an expanding TAM, Beck said. Square could face a headwind of around 50 bps to growth if business formation decelerates by about 4 percent, he said, adding that this can be mitigated by the large number of expanded use cases.

Square’s GPV has grown by 20-30 percent in the last seven quarters and is projected to grow by 28 percent in 2019, according to KeyBanc. 

Price Action

Square shares were trading up 1.8 percent at $67.15 at the time of publication Wednesday. 

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Photo courtesy of Square.