Square's Lofty Valuation Still Needs Further Validation

Square Inc SQ reported robust Q3 2016 results beat expectations. The company also raised guidance once again.

Square raising FY 2016 EBITDA guidance represents an increase in that metric in each of its first four quarters as a publicly traded company.

The Software and Data Products segment grew 17 percent sequentially in Q3 to $35 million, while Square Capital saw sequential loan origination growth of 10 percent to $208 million.

“These growth rates could be characterized as quite hpealthy under most circumstances, but they were lower than the 25 percent sequential growth in Software and Data Products and the 23 percent sequential growth in Square Capital’s loan originations posted for 2Q16,” said BTIG's Mark Palmer.

Investopedia pointed out that Square was well positioned to beat results, representing the fourth successive quarter of beat results since its IPO in November 2015.

Stock Valuation

Palmer expects the stock to react positively to these results, “and keep the short sellers who have been circling the name since its IPO at bay again.”

The analyst also believes that a more meaningful share price appreciation would require “additional confirmation of the future trajectories of the businesses included in its critical Software and Data Products line item.”

In fact, following the results, the stock was up almost 4 percent in after-hours trading.

Palmer believes additional confirmation of rapid growth in the company’s key areas could justify a fuller valuation, and that the stock was fairly valued at present.