Square is a solid success story, but should it be valued on par with, or even at a premium to, some of the most successful companies of our time? The market and at least one analyst appear to think so.

Shares of the payments company founded and run by Twitter Chief Executive Jack Dorsey are up 173% this year. Earlier this week Nomura Instinet analyst Dan Dolev poured gasoline on the fire with a note saying Square should join the ranks of the famous FANG stocks— Facebook, Amazon, Netflix and Google—which have dominated market gains in recent years.

The note’s flashy headline was picked up widely by media outlets including CNBC, sending Square shares up 11% in one day.

The entire episode is reminiscent of the late 1990s, when analysts would slap arbitrarily high price targets on rising stocks, hatching up novel valuation arguments and relying on relative comparisons to other overvalued companies.

“Trust me, if we were back in the late ‘90s, I’d be in good shape,” said Mr. Dolev in an interview. “This is no Pets.com. There’s real growth and profits here.”


Mr. Dolev points to the company’s displacement of traditional merchant acquirers, or companies that help merchants accept card payments. He sees Square growing revenue by an average 45% over the next three years as it signs up more large merchants, not just the small businesses that have been its mainstay.

The note cites a novel metric of “price-to-sales-to-growth,” or market value divided by sales divided by forecast sales growth, to argue Square is actually cheap. This rarely seen measure, at 0.18 before Square’s run up this week, is less than that of Facebook at 0.23, Google at 0.27 and Netflix at 0.28, Mr. Dolev says.

Mr. Dolev concludes by raising his price target on Square to $125 from $86, based on a lofty 14 times estimated sales in 2021. Square stock currently trades around $95. Competitor and fellow investor darling Worldpay trades at eight times this year’s sales.

It is easy to poke holes. The growth forecast is of course uncertain. Established merchant acquirers like Worldpay and JPMorgan Chase, plus innovative players like PayPal, will compete fiercely for every merchant dollar. Other FANG stocks are arguably overvalued themselves.


Even the relative valuation argument falls apart when profits rather than sales are considered. Square’s price-to-earnings-to-growth—the more commonly cited PEG ratio—stands at 2.86, according to FactSet, based on forecast earnings for the next 12 months. That compares to 1.48 for Netflix and 1.51 for the whole FANG group.

When a stock is priced at a 93% premium to Netflix, even on a measure that takes into account expected growth, it is a sign the stock, and in this case the overall market, is frothy. Investors should brace for a return to reality.

Write to Aaron Back at aaron.back@wsj.com