Square Inc (NYSE: SQ) is up another 5.5 percent since reporting a second-quarter earnings beat last week, and it now up an incredible 103.9 percent year-to-date. However, even after such a big rally, The Buckingham Research Group analyst Chris Brendler says it’s not too late for long-term investors to feel good about buying SQ stock.
According to Brendler, investors are right to question Square’s valuation with the stock priced at about 57 times consensus 2020 earnings per share estimates. But Brendler says Square’s “astronomical multiples” look much less scary when the company reports the kind of growth it did in the most recent quarter.
“With accelerating momentum across a broadening suite of software/services that suddenly not only target its massive base of [small- and mid-sized businesses], but increasingly consumers, we think 2Q’s impressive acceleration is sustainable,” Brendler says.
He says Square’s Cash App is still in its infancy and the company has room to expand its services further into the realm of consumer lending, digital banking and cryptocurrency trading. “While we still have some concerns about sharply rising expectations against a no-room-for-error valuation, we see no reason why SQ won’t continue to report better-than-expected core revenue growth into 2020,” Brendler says.
Buckingham is projecting Square will maintain adjusted earnings before interest, taxes, depreciation and amortization margins of at least 40 percent in the long term. Buckingham is forecasting Square’s gross payment volume will grow from just $65.3 billion in 2017 to $351.8 billion by 2025. At the same time, Brendler says free cash flow will increase from $102 million to $3.15 billion, and earnings per share will expand from 27 cents to $5.95.
But while some analysts remain bullish about Square even after the stock has doubled in eight months, others are not. CFRA analyst Scott Kessler says there’s no way to justify Square’s valuation.
“We see mounting competition and think SQ will have challenges as it expands,” Kessler says. “We also think the valuation is excessive.”
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