Citi is getting more bullish on Square, citing the payment company's growth potential and emergence as a player in banking for next generation consumers.
The firm upgraded Square shares to a buy with a $90 price target Tuesday, about 20 percent higher than their $75 closing price a day earlier. Shares are already on a tear this year — up 116 percent since January and more than 100 percent year over year. The stock rose 2.8 percent Tuesday morning to $77.13.
Square reports third-quarter results after the closing bell on Wednesday. Ahead of that, Citi lifted its 2019 adjusted revenue estimate and now sees growth of 51 percent, compared with the Wall Street consensus estimate of 42 percent. Citi cited Square's spending and payback model.
"We believe the company is positioned well to grow in line with some category leaders in payments and software," the Citi note said. "We remain convinced that Square is both a 'new market' and 'lowend' disruptor, currently growing its ownership in the micro and small business commerce enablement space – a large category that has historically been under served."
The firm noted Square's "robust" user acquisition spending and plans to expand its San Francisco headquarters. The fintech company announced a 34 percent increase in office space by February 2019 in a SEC filing shortly after its August earnings results. Citi expressed confidence in "continued platform growth."
Job openings were another bullish undercurrent in Citi's upgrade. The number of open opportunities on Square's external job board has increased by about 15 percent since Citi last counted in April 2017.
"It's clear the company has increased its desire to ramp headcount in marketing, operations, and talent recruitment," Citi said.
But Square did lose one key employee this year. In October, CFO Sarah Friar announced she was stepping down to become CEO of Nextdoor. Shares of Square, run by Twitter CEO Jack Dorsey, dropped as much as 8 percent after the announcement. Any progress on Friar's replacement should be positive momentum for the stock, Citi said.
"We have no reason to believe Square's CFO departure relates to a negative change in the company's forward prospects — we think most would agree that Ms. Friar is of CEO-caliper and her pursuit of an outside CEO role is genuine," Citi said. "Given Square's category leadership and high profile, we do believe the company is well-suited to attract a highly talented CFO to help lead the company in its next phase."
Square is best known as a payments processor but has moved into some traditional banking areas like small business lending. Citi said the consumer lending arm was a possible risk. By definition, the company is now "highly exposed" to small business and consumer spending and "investors appear more cognizant of this risk," Citi said.
"We think SQ is a category leader in the democratization of ERP-like [enterprise resource planning] software tools for [small-to-medium businesses] and potentially a player in developing banking tools for the next generation consumer," Citi said.