Square (SQ) shares are on the rise with a gain of 3.6% to $70.83, closing in on a 52-week high after an especially bullish report from The Buckingham Research Group.
"With accelerating momentum across a broadening suite of software/services that suddenly not only target its massive base of [small- and mid-size businesses] (over 2M), but increasingly consumers, we think 2Q's impressive acceleration is sustainable," wrote BRG analyst Chris Brendler.
He upgraded Square to Buy from Neutral and raised his target price to $85 from $65, implying 24% upside from Friday's close. "In our view, Cash App is just the beginning as we see growing potential for SQ in consumer lending, digital bank accounts, and cryptocurrency trading," he wrote.
Brendler tells Barron's his upgrade is based on the financial-services company's fiscal second-quarter earnings report last week, which surpassed analysts' expectations. Square reported earnings of 13 cents on a 60% jump in year-over-year adjusted revenue to $385 million. It was Square's fifth straight quarter of revenue growth, although some analysts were concerned about earnings guidance.
"The quarter results represent a key inflection that renders prior estimates-and our valuation concerns-obsolete," Brendler says. He noted that he previously struggled with Square's valuation, given its high multiples as well as competition from PayPal (PYPL), Visa (V), MasterCard (MA), and others.
Top-line growth in Square's software and services, from 98% to 127%, is dynamite," says Brendler. He's keen on Square's acquisitions of website builder Weebly, for which it paid a company-high $365 million to build its online and e-commerce offerings for small- and medium-size businesses, and food-delivery business Caviar, to beef up its restaurant business. By branching into both markets, Square expanded what had been a market largely confined to small businesses, he says.
It was also hard to ignore the steep trajectory of Square's stock, he says. Shares of the company, led by Twitter (TWTR) Chief Executive Jack Dorsey, have doubled this year.
The report makes Brendler among the most optimistic of Square analysts, some of whom are jittery about the volatile price of bitcoin and Square's lending business. Of 35 analysts covering Square, 15 have it at "Buy," 16 at "Hold," and four at "Sell," according to FactSet. The mean target price is $67.97.
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