Why Square Stock Gained 37.1% in August

What happened

Square Inc. (NYSE: SQ) stock climbed 37.1% in August, according to data provided by S&P Global Market Intelligence. The payment-processing company's price actually trended down in the after-hours trading following its earnings release on Aug. 1, but this reversed in the next day of trading and shares went on to post huge gains in the month.

Adjusted earnings per share guidance for the third-quarter came in below the average analyst estimate, but second-quarter sales and earnings beats viewed through the lens of the business's potential for ongoing growth pushed the stock to new heights. Shares also likely benefited from some favorable ratings coverage in the month.

So what

Square's adjusted sales for the June quarter climbed 60% to reach $385 million and topped the average analyst revenue estimate by $17.4 million. The company's adjusted EBITDA margin also improved from 15% in the prior-year quarter to 18%. As fellow Motley Fool contributor Daniel Sparks has pointed out, Square has now delivered five consecutive quarters of accelerating sales growth and is seeing continued success in getting large customers on board with its hardware and services.

Following the earnings release, Buckingham Research published a note upgrading the company to a buy rating and assigning an $85 price target -- a level that the stock has since surpassed. Nomura also published a report on Aug. 14 reiterating a buy rating on the stock and assigning an $86 price target.

Between its point-of-sales products, Cash App, Caviar, and other projects, Square has an impressive range of growth drivers delivering great performance. Caviar is seeing tremendous growth, with sales in the second quarter more than doubling compared with the prior-year period. Total payments conducted through the company grew 30% year over year, setting a new record at $21.4 billion. Cash App spending has climbed to $3 billion on an annualized rate, and the app is being integrated with other company services.

Now what

Square management now expects between $1.52 billion and $1.54 billion in sales for the third quarter, up from its previous target of sales between $1.45 billion and $1.48 billion. The stock's impressive run has continued in September, with shares up roughly 4% in the month as of this writing.

Square certainly looks like an expensive stock, trading at more than 200 times this year's expected adjusted earnings, but that valuation would likely look cheap in retrospect if the business is able to maintain its current trajectory. The company should continue delivering tremendous growth in the near term, but investors will have to weigh the strong recent performance and potential room for continued growth against the stock's lofty valuation.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short September 2018 $80 calls on Square. The Motley Fool has a disclosure policy.