Buckingham Calls Square A 'Unique Tech Disruptor'

Shares of Square Inc SQ ended 2017 higher by more than 150 percent. While it's unlikely for the stock to record another triple-digit percentage gain in 2018, that doesn't mean investors should avoid owning shares.

The Analyst

Buckingham Research Group's Chris Brendler initiated coverage of Square's stock with a Buy rating and $42 price target.

The Thesis

Square is a "unique tech disruptor" that happens to be in the early stages of a global roll-out, Brendler said in a note. The company boasts a "dominant" small and medium business-focused payments franchise with a high-margin software solution that is scaling rapidly. In fact, the company faces a "Netflix-like" international expansion where the payment opportunity is "arguably better outside the U.S." with a less intense competitive landscape. As such, there's little reason to believe that the ongoing momentum it has seen in 2017 won't continue into 2019, according to Brendler.

While Square's valuation is "challenging," management's reputation of delivering beat-and-raise quarterly reports should help support the stock into 2019. Specifically, the stock is trading at an "eye-popping" 24.5 times the analyst's 2020 EBITDA estimate, which implies the case could be made for investors to wait for a better entry point. The analyst's $42 price target is based on a more reasonable 19 times 2022 EBITDA and discounted back two years.

"While this longer-term view greatly increases the uncertainty, we believe the potential variances are weighted to the upside with such strong underlying momentum plus material upside from potential M&A and int'l expansion," Brendler said. "Combined with continued EPS momentum in 2018, we expect the stock to deliver on high expectations and justify its premium valuation."

Price Action

Shares of Square gained around 2 percent to $37.80 Thursday.

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Image Credit: Tony Webster (Own work) [CC BY-SA 3.0], via Wikimedia Commons