With Square Inc (NYSE: SQ) stock up 175 percent in the past year, it’s understandable for investors to be concerned about the stock’s ballooning valuation. However, Buckingham Research Group analyst Chris Brendler says Square simply has too many positive long-term trends for investors to get hung up on its steep share price.
Brendler says Square is a market leader in integrated payments and has differentiated its offerings with superior, simple, accessible and unique solutions. In the near term, all of the company’s key metrics indicate it could continue its trend of beating market expectations and raising guidance. The integrated payments business is still in its early stages, and Brendler says Square has made itself a clear market leader in the space.
Even though earnings expectations have risen along with Square’s share price in the past year, Brendler says Square still has room to exceed expectations on volume growth, new product revenue, margins and free cash flow. In addition, he compares Square’s potential for international expansion to that of Wall Street darling Netflix (NFLX).
“SQ’s payments opportunity is arguably better outside the U.S., where competition is both less intense and tech-centric,” Brendler says.
Finally, he says Square is also a serious buyout candidate given its huge growth numbers and relatively modest $16 billion market cap. Brendler says Paypal Holdings (PYPL) is the most likely buyer, but any company looking to establish a major presence in the payments business could be interested.
The only potential hang-up for Square buyers is the stock’s sky-high valuation, which Brendler acknowledges is concerning. After the stock’s huge gain over the past year, it currently trades at an elevated 24.5 times Buckingham’s estimated 2020 earnings before interest, taxes, depreciation and amortization estimate. Unfortunately, Brendler says investors waiting for a better entry point may never get the opportunity. The stock is already down roughly 25 percent from is November high, and Brendler doesn’t anticipate the pullback will go much deeper.
While the price may be high, Brendler says investors should consider Square’s incredible long-term potential and simply pay up for the stock.
“Although the current valuation is challenging, we are…
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