After Its Earnings Pop, Is Square a Buy Today?

Source: Square.

Today's investing climate isn't the most hospitable for recent IPOs such as mobile-payment upstart Square (SQ -1.97%).

Led by double-duty CEO Jack Dorsey, who also heads up Twitter, the mobile-payment company came to market late last year at a lower valuation than its final private fundraising round, adding yet another data point to the Tech Bubble 2.0 narrative that's the subject of much debate among tech investors today.

Fast-forward to this month, and Square recently gave investors their first glimpse into its business progress when it reported its initial post-IPO earnings last week. Let's look at some of the notable takeaways.

Impressive earnings
Though there's still work to do, Square's earnings were overwhelmingly positive. Here's a quick overview of four of the company's key financial metrics and how they changed year over year at Square.

Source: Square investor relations. Revenue, net income, and EBITDA in U.S. millions.

The report sent Square's share up more than 3% in after-hours trading, suggesting the market viewed the overall performance favorably, though the sock has since dipped. For anyone who routinely looks at early stage tech companies, this kind of income statement should seem familiar. When you're talking about a 7-year-old company attempting to disrupt a multibillion-dollar industry, its lack of profitability shouldn't be a surprise.

Source: Square.

Going forward, though, the company has pledged to push its adjusted EBITDA, which takes in a number of important costs, into positive territory for fiscal 2016. Fast-growing tech companies such as Square are increasingly using adjusted EBITDA as a marker for financial performance, which typically backs out costs such as stock-based compensation. The argument goes that such expenses aren't core to running their businesses, though plenty of investors -- notably Warren Buffett, -- would argue otherwise. Either way, Dorsey and company expect adjusted EBITDA to reach a range of $6 million to $12 million this year. But it's unclear when bottom-line profits might arrive.

But is it a buy?
Square's growth is impressive, and its market opportunity is massive. However, likely reflecting its big-ticket promise, the company's shares aren't necessarily the most affordable.

Source: Square.

One of the frustrations in valuing Square is that its lack of profits renders most valuation metrics useless. On one hand, Square trades at a forward price-to-earnings multiple of 578. However, the average sell-side analyst also believes the company will grow its sales at around 20% annually for the next five years. What's more, Square's top-line price-to-sales ratio of 1.5 compares favorably with mobile-payments competitor PayPal and its 5.2 multiple -- though increased risks at Square could help justify the lower multiple against the more mature PayPal. Square's average 12-month price target of $13.50 implies a roughly 17% upside from its $11.57 trading price as of Monday's market close. That seems like a mixed bag. And it makes it hard to determine whether Square is a buy today.

The company's recent growth is compelling, and most signs indicate a healthy growth trajectory. However, prospective investors will need to feel confident enough in its long-term prospects that they'll be willing to wait for it to grow into its valuation.

Sometimes the best course of investing action is to do nothing. With only a single public report under its belt, it seems prudent to wait for another quarter or two to see how earnings growth plays out.