Wedbush Downgrades Square (SQ) to Underperform Ahead of Lockup Expiration

Wedbush downgraded Square (NYSE: SQ) from Neutral to Underperform with a price target of $9.00 (from $11.00).

Analyst Gil Luria commented, "We believe that Square is rapidly growing a business that may never reach peer (or guided) profitability, which will become apparent as growth slows over the next couple of years on competition and saturation. We believe upcoming lockup expiration will provide the catalyst and we are therefore downgrading to UNDERPERFORM ahead of this event."

Luria said Square is selling at Wal-Mart prices with Neiman Marcus cost structure.

They see the SMB loan broker business as a risky growth engine as evidenced by the company’s reference to “challenging credit market conditions”.

They do not believe the current software business (<$20 million revenue and <5% adjusted revenue) can mitigate this outcome anytime soon.

They do not believe investors will be impressed with LSD Adj. EBITDA margins in 2016, especially as this excludes 18% of adj. revenue going to Stock Based Comp.

Square’s short interest of 6% outstanding shares appears at the low end of high-growth/high-risk peers.

They expect many of the VC holders of the 90% of shares being unlocked 5/17 to sell at any price above $9 based on previous actions.

For an analyst ratings summary and ratings history on Square click here. For more ratings news on Square click here.

Shares of Square closed at $13.05 yesterday.

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