I am neutral on Square (SQ) as the company’s strong competitive position in its industry, strong growth momentum, and general support from Wall Street analysts is offset by its fairly high valuation multiples.
Square is a U.S. digital payment and financial service provider founded in 2009 by Jack Dorsey, the co-founder and CEO of Twitter (TWTR), and Jim McKelvey. (See Analysts’ Top Stocks on TipRanks)
Strengths
Square has a valuation of almost $100 billion, making it one of the major players in the financial technology space.
The company is known for creating CashApp, which is an innovative person-to-person payment network. The company made a particularly smart acquisition when it bought majority shares in Tidal, as this boosted its competitive positioning.
Square has offices in the United States, Canada, the U.K., Australia, Japan, Spain, Norway, and Ireland, giving it a global presence with access to the world’s most developed economies.
Recent Results
Square reported revenues of $3.8 billion in its third fiscal quarter of 2021, which fell short of analysts’ estimates of $4.4 billion. It generated earnings of $0.37 per share, which was in line with analysts’ predictions.
The company generated a gross profit of $1.13 billion, which showed an increase of 43% year-over-year and was primarily attributed to the 48% growth in gross profit seen in the Seller ecosystem. Its Cash App generated a gross profit of $512 million, which showed an increase of 33% as compared to the same quarter of the previous year.
Square reported growth with complex sellers, including its mid-market sellers that grew gross profit almost twice as fast as the overall Seller business based on two-year CAGR. The company also launched Cash App Pay, creating an innovative commerce experience for Cash App clients and creating powerful integration between the Cash App and Seller ecosystem.
Square also reported a strong growth in its gross payment volume, which tracks the total dollar amount, net refunds of the processed card payments by sellers who use the company’s payment system. This includes peer-to-peer payment and merchant transactions that use the Square mobile app. The GPV was $45.4 billion, showing a 43.2% growth year-over-year, ahead of analysts’ prediction of $44.7 billion.
Valuation Metrics
Square’s stock looks richly valued at the moment as its EV/EBITDA ratio is currently 105.4x compared to its five-year average of 88.9x, and its P/E ratio is 137.4x compared to its historical average of 117.2x.
While the multiples are high, the growth prospects remain strong as EBITDA is expected to grow by 110.4% in 2021 and normalized earnings per share are expected to grow by 102.4% in 2021, though both growth rates are expected to slow down to around 10% in 2022.
Wall Street’s Take
From Wall Street analysts, Square earns a Moderate Buy analyst consensus based on 17 Buy ratings, four Hold ratings, and one Sell rating in the past three months. The average Square price target of $306.48 puts the upside potential at 42.1%.
Summary and Conclusions
Square is a leading player in the rapidly growing and evolving financial technology sector, and as a result enjoys very strong growth momentum.
That said, the company’s valuation multiples are sky high right now and growth is expected to moderate in 2022, so the company may already be fully valued, if not overvalued here. As a result, investors might want to wait for a pullback before adding shares.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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