I am neutral on Square Inc. (SQ), as its strong growth rate, and bullish Wall Street consensus, are offset by its rich valuation.
Today, Square is used by millions of businesses, and offers the most comprehensive POS system in the market, as well as payment hardware products and other financial services. (See Square stock charts on TipRanks)
Square recently struck an acquisition deal worth $29 billion with Afterpay, an Australian consumer lending company, which is the biggest acquisition Square has ever made.
The company also acquired majority shares in TIDAL, the global subscription-based music streaming service. These acquisitions strengthen Square’s competitive advantage by increasing its network size, as well as its capabilities.
The company’s mobile payment service, Cash App, has seen increased interest from customers who use the platform to instantly send Bitcoins, direct deposit paychecks, and benefit from more functions.
Square reported total net revenue worth $4.7 billion in the second quarter of 2021, showing a 143% gain over a year-over-year basis.
The company’s total net revenue in the second quarter, after excluding Bitcoin, was $2 billion, showing an increase of 87% from the second quarter of 2020.
Meanwhile, the company’s gross profit was reported at $1.1 billion (up 91% year-over-year), transaction-based revenue was $1.2 billion (up 80% year-over-year), and transaction-based gross profit was $543 million (up 85% year-over-year).
With multiple products and services, the company faces stiff competition in both consumer apps and the small business markets, and it is expected that the latter quarter of 2021 will see the rivalry between the company and PayPal (PYPL) heat up.
In the coming months, Square expects its Seller and Cash App to deliver strong gross profit growth on a year-over-year basis.
Square stock looks pretty expensive at present, with a forward P/E ratio of 137.5x.
That said, normalized earnings per share are growing quite rapidly, with 2021 normalized earnings per share expected to grow by 123%, and 2022 normalized earnings per share expected to grow by 23.1%.
Wall Street’s Take
From Wall Street analysts, Square earns a Moderate Buy analyst consensus based on 18 Buy ratings, four Hold ratings, and one Sell rating in the past three months. Additionally, the average SQ price target of $313.38 puts the upside potential at 19.4%.
Square is enjoying rapid growth, and has fairly strong support from Wall Street analysts. That said, the stock trades at a very high P/E ratio, and will have to grow at a rapid pace for several years in order to justify its current multiple.
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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