Coverage Initiated and FY2016 Outlook: Buy PT: $23

Coverage Initiated and FY2016 Outlook for Square, Inc. (SQ) 

For FY2016 we are expecting GPV (Gross Payment Volume) to reach $48 billion and $55 billion on an annualized basis in Q4. We expect transactional revenue to be $1.5 billion or roughly 3% of the GPV. Software and data products (SDP) should bring in $200 million in revenue in 2016, roughly a fourfold increase from 2015 ($58M).

Transaction revenue should bring in $500 million in gross profit in 2016 and SDP should bring in $130 million in gross profit. Sales from hardware, Starbucks, and other revenues sources should bring a gross loss of ~$50 million. 

In total, we are expecting $580 million in gross profit. Operating expenses should rise to $625 million, a slower rate of growth than revenue (due to economies of scale). The net loss of $(45) million is significantly less than 2015's $(175) million (Adjusted without dividends and income tax). This should net to around $(.19) EPS.

Our price target is based on an expected EPS of $1.53 in 2017.

Price Target: $23

Recommendation: BUY