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Why Square Stock Just Popped

By Rich Smith – Oct 7, 2021 at 11:07AM

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Jefferies calls Square the "must own" stock in fintech.

What happened

Shares of point-of-sale payments processor Square (SQ -1.43%) jumped out of the gate this morning, and were up a solid 3% as of 10:25 a.m. EDT.

You can thank Jefferies Financial Group (NYSE: JEF), which upgraded the stock and raised its price target.

Arrow angles up on a green stock chart

Image source: Getty Images.

So what

This morning, investment bank Jefferies announced a change in analyst coverage of Square and an upgrade of the stock to buy, with a higher price target as well: $300 a share.

Square is a proven innovator, the bank said, and is disrupting the fintech industry at an "accelerating" pace. Its Cash App is already "the leader within the crowded neobank category" and its purchase of Afterpay could make it a similar outperformer in the buy now, pay later space.

Now what

With Square already a proven performer with a long runway for growth, Jefferies considers it a "must own" stock for growth investors.

That being said, at a valuation of nearly 200 times trailing net profit, Square is not a cheap stock. To justify its buy rating, Jefferies had to do a bit of twisty-turny financial gymnastics. It ultimately valued the stock on a curious combination of gross profit (expected to be about $11.1 billion in 2025) divided by the company's anticipated growth rate.

Jefferies argues that by this metric, Square stock sells for a growth-adjusted multiple of 0.7 on fiscal year 2023 gross profit, versus a peer-average multiple of 1.06, making it a bargain in the analyst's opinion.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.

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