Square Faces Slower Growth Prospects, Analyst Says

Square Inc.’s share price slid 10% Tuesday in the wake of an analyst’s report saying growth for the high-flying merchant processor is becoming tougher.

Square’s organic growth probably peaked in 2018’s third quarter and growth in subscriptions and services will slow in 2019’s second quarter as recent acquisitions are absorbed, says John Davis, who follows financial technology and payments companies at St. Petersburg, Fla.-based Raymond James & Associates. Further, Davis says he does not see a hot new product such as Square’s Instant Deposit on the horizon.

Square also faces a downside if it obtains a charter for an industrial bank (also known as an industrial loan corporation), according to Davis. Square recently resumed its widely-watched quest for an ILC charter in order to broaden its product line and offer banking services directly rather than through partners.

“We believe if the company is ultimately successful obtaining an ILC charter, it could prove to be a negative catalyst for the stock as it will likely increase Square’s exposure to credit- and bank-related products/revenue,” the report says. It later adds, “Very simply, adding more credit- and bank-related products increases the cyclicality of an already macro-sensitive business and would likely be multiple dilutive” to earnings per share.

A spokesperson for San Francisco-based Square declined to comment.

Square has been an active product developer and acquirer of smaller companies in the past few years as it sought to offer a diversified set of software and services to merchants and generate revenues beyond pure payment processing. Instant Deposit debuted in 2015 to enable merchants to accelerate access to their funds in return for a 1% fee. That year it also launched a payroll service, and most recently it announced the Square Card, a Mastercard business prepaid card for its sellers. The new card “is unlikely to be material,” the report says.

Square Inc. bought e-commerce site provider Weebly Inc. last June. That acquisition came less than two months after the company bought Zesty, operator of a catering platform, to enhance its Caviar food-ordering operation.

“While admittedly full of assumptions given the lack of detail disclosed, we believe that [subscriptions] and services organic growth likely peaked in 3Q18 driven by Instant Deposit and will likely materially decelerate in 2Q19 once slower growing Zesty [and] Weebly are added to the base,” the Raymond James report says.

Raymond James downgraded Square’s stock to its “underperform” category from “market perform.” It says the stock has an estimated fair value of $56 per share, about 27% lower than its recent trading range. On Tuesday, Square closed at $68.56 on the New York Stock Exchange, down 10%, or $7.66, from Monday’s $76.22 close. Update: Square’s shares were up about 1% in late Wednesday morning trading.