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Square shares rise after Citi upgrades ahead of earnings report

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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.



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Goldman says U.S.-China not likely to reach trade deal by March and more tariffs are coming

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President Donald Trump (L) and Chinese President Xi Jinping walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.

Jim Watson | AFP | Getty Images

President Donald Trump (L) and Chinese President Xi Jinping walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.

Goldman Sachs economists said it’s more likely than not that U.S.-China trade negotiators will not reach a deal in time to head off higher tariffs on March 1, and importers could rush to order their goods in January and February ahead of the deadline.

President Donald Trump and Chinese President Xi Jinping agreed to hold off on further tariffs until March 1 so the two sides could negotiate a trade agreement. China also agreed to remove new auto tariffs on U.S. imports, and Washington reported that Beijing is fulfilling another promise to purchase American soybeans, with its first significant order in six months, amounting to 1.13 million tons.

But they have to show some progress by the March 1 deadline in order to delay further action. “While we think it is a close call, we believe it is slightly more likely that negotiations will fall short of what is necessary for a further delay,” wrote the Goldman economists.

Goldman said international trade data reflect the front-loading of goods ahead of the last round of tariffs, and also the fact that soybean purchases had fallen off dramatically.

The October trade data were the first look at what happened after tariffs on $200 billion in Chinese goods and on $60 billion of U.S. goods went into effect in September. Goldman said imports and exports were both pulled forward before the $200 billion tariff round went into effect Sept. 24, and they both fell after tariffs were implemented, just as they had done after the first round.

Over the summer months, the U.S. had also implemented 25 percent tariffs on $50 billion in Chinese imports, and China responded in kind.

The effect was a widening in the U.S. trade deficit. “Declining exports along side modestly increasing imports pushed the trade deficit with China to an all-time high in October,” the economists wrote.

U.S. imports from China are about $5 billion lower on an annualized basis and exports are about $15 billion lower, due to seasonal factors surrounding soybean exports to China. The economists said there have been sizable shifts in a few large categories, which includes the impact from soybeans. About 60 percent of annual exports of soybeans to China are in the fourth quarter, about 25 percent in October alone.

“Excluding soybeans, exports to China are only modestly lower on a seasonably adjusted basis,” they wrote. As for imports, U.S. imports of electronic circuits and memory components rose ahead of the second round of tariffs and fell sharply after they were put in place

If there is no agreement by March 1, tariffs are scheduled to rise to 25 percent from 10 percent on $200 billion in Chinese goods.

WATCH:How big Harley-Davidson is and why it’s a trade-war target



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‘We are tired of people asking us about target prices’  

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In November, Lee cut his price target from $25,000 to $15,000. A key driver for the revision was bitcoin’s “break-even” point, the level at which mining costs match the trading price.

Bitcoin is closing out a miserable trading year. The cryptocurrency is down 75 percent since January, trading near $3,324 on Thursday, according to data from CoinDesk. From its high near $20,000 in December, the cryptocurrency has lost more than 82 percent of its value.

For bitcoin to stage a price rebound, Lee said user adoption needs to increase, and it needs to be embraced as a real asset class.

But looking out longer term, if the amount of bitcoin users approached even 7 percent of Visa’s total 4.5 billion currently, Lee’s regression model would place fair value at $150,000 per bitcoin.

“Hence, the risk/reward is still strong,” Lee said. “Given the steep discounts of [bitcoin] to our fair value models, the excessive bearish sentiment about fundamentals does not seem warranted.”

Still, Lee said technicals remain important in cryptocurrency trading and as long as bitcoin remains below its 200-day moving average, investors will likely still stay bearish.



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Slower IT spending could reveal Cisco’s ‘imperfections,’ analyst says

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While stronger technology spending across Wall Street and a spell of innovation at Cisco have boosted the stock to post-recession highs, shares now look a little expensive, according to Normura Instinet.

The brokerage downgraded Cisco’s stock to neutral from buy on Friday, arguing that the strong stream of IT purchases that has buoyed shares may reverse in 2019 to “reveal imperfections in Cisco’s story.”

“Through 2018, IT spending growth accelerated materially, Cisco’s new Catalyst 9000 series more than tripled its customer count, and Cisco’s software mix hit about 25 percent of sales. These drivers helped Cisco exceed consensus estimates through 2018,” analyst Jeffrey Kvaal wrote in a note to clients.

“However, spending may be wobbling; comments from Dell, HPE, and Broadcom suggest incremental caution in chief investment officer thinking,” Kvaal added. “Cisco’s ongoing product refresh leaves it insulated, though not immune, from a slowdown.”

The analyst reiterated his 12-month price target of $50, which implies just 5.3 percent upside over the next year from Thursday’s close of $47.47. That price target yields a multiple of about 15 times Nomura’s calendar year 2019 earnings per share expectation of $3.33.

Shares of Cisco fell more than 2 percent in premarket trading following the downgrade; shares are up 23.9 percent this year.



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