Square's 'Astronomical' Valuation No Longer A Concern For Buckingham

Heading into Square Inc SQ's earnings report last Wednesday, Buckingham struggled with recommending the stock at an "astronomic" valuation of 57 times consensus 2020 EPS. Now that the stock is exiting a strong earnings report, the valuation "doesn't look as expensive anymore" to the sell-side firm. 

The Analyst

Buckingham's Chris Brendler upgraded Square from Neutral to Buy with a price target lifted from $65 to $85.

The Thesis

Square reported a strong second quarter that immediately puts any valuation concerns to bed, Brendler said in the upgrade note. (See the analyst's track record here.)

The payment processor showed accelerated momentum across nearly its entire business that appears sustainable, Brendler said. The new Cash App is in the very early stages of addressing consumer lending, digital bank accounts and cryptocurrency trading, he said. 

Buckingham's prior cautious stance now "feels like the wrong decision," although it was warranted at the time based on top-line growth concerns, the analyst said. The extent of the top-line beat in the quarter "changes our thinking" and the company has now reached an inflection point where management is likely to deliver upside to revenue expectations through at least 2020, Brendler said. 

Square's momentum exiting Q2 is clear and now is the time to "get back on board before it's too late," the analyst said.

Buckingham's revised $85 price target is based on a blend of 30.8 times estimated 2023 EPS discounted back three years and a discounted cash flow model for the coming years.

Price Action

Square shares were trading up 1.3 percent at $69.25 at the time of publication Monday. 

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Photo courtesy of Square.