Square (SQ)

Square (SQ)

Summary:  ON SALE

Score:  11/20

MOS:  56%

Share Price:  $246

Sticker Price:  $566

Square is a financial services, merchant services aggregator, and mobile payment company founded in 2009 and based in San Francisco, California.  Today they have just over 5,000 employees.

Here are some fun facts on the company.

  • The original inspiration for Square occurred to Jack Dorsey in 2009 when Jim McKelvey (a friend of Dorsey) was unable to complete a $2,000 sale of his glass faucets and fittings because he could not accept credit cards.
  • Co-founders Dorsey—who also co-founded Twitter—and McKelvey began developing the company out of a small office in St. Louis.
  • The name “Square” derives from the company’s square-shaped card readers

Square generates revenue through 5 primary channels:

  1. Transaction fees

Square’s standard processing fee is 2.6% + $.10 per transaction for contactless payments, swiped or inserted chip carts, and swiped magstripe cards. Square’s Virtual Terminal charges 3.5% + a $15 fee per transaction. In comparison, PayPal charges 2.9% + $.30 per transaction, and Stripe charges 2.9% + $.30 per transaction.  

  1. Cash App

Square’s Cash App allows consumers to make peer-to-peer transactions for free but charges 2.75% to businesses that accept Cash App. Similar to PayPal or Venmo, free peer-to-peer transactions are a great way to get a massive volume of consumers within the ecosystem. 

  1. Subscription fees 

Square offers software subscription products including appointment management, payroll management, email marketing, and rewards programs that range between $15 and $45 per month and are focused on small businesses.

  1. Hardware 

Square sells hardware products including payment terminals and card readers that range in price from $10 on up to $800.  These are one-time purchase items which are also focused on small businesses.

  1. Bitcoin 

You may also buy bitcoin through Square and the platform charges you about 1.76%. 

When you take a step back, Square has an impressive array of revenue channels. Transaction fee business models as well as SaaS business models are two of the most scalable business models today. 

Transaction fees are low friction and highly lucrative. Most consumers don’t complain about transaction fees because they are typically unnoticed. 

SaaS applications are highly lucrative and scalable because there is no supply chain or inventory. Whether you sell one licence or one million licenses, the only major costs you will incur are additional customer service staff (if they are even needed). With low-touch SaaS platforms, you can typically sell a massive volume of licenses without adding too many employees.

Here is the latest news.

This article from The Motley Fool states that Square’s share price shot up by 5.5% on July 20th because the company announced it launched a new suite of banking services. As mentioned by Square’s leadership team “”By offering essential banking tools that work seamlessly with Square’s ecosystem of solutions like payments and Square Payroll, sellers now have a single home for their entire business, gaining a unified view of their payments, account balances, expenditures, and financing options.”

This article from Barrons state’s that CEO Jack Dorsey announced a new business unit at Square is developing a DeFi (Decentralized Finance) platform. Mark Palmer, an analyze at BTIG mentioned that “The company is well positioned to offer an on-ramp for decentralized finance, or DeFi, which relies on blockchain technology rather than financial institutions like banks to broker transactions, to attract mainstream consumers who are drawn to Square’s Seller and Cash App services.”

This article from American Banker states that Square’s investment in Bitcoin transaction services has paid off big. 80% of the revenue from the previous quarter was generated through Bitcoin transactions.

Now let’s take a look at the 4 M’s

MOS (Margin of Safety): With a score of 11/20 and a MOS of 56%, the financials are good but there is certainly room for improvement. Based on the new suite of banking services as well as the DeFi developments, we should expect to see continued financial growth. Pay close attention to the next earnings report.

Meaning: Will Stripe be around in the next 10 years? Absolutely. The “War on Cash” movement is expected to continue for over the next decade. At some point, paper money and coins will no longer be used and platforms like Stripe will be the cause. The key factor to pay attention to is Stripe’s various revenue streams. Serving both businesses and consumers with transaction based services as well as SaaS based services is a powerful combination.

Moat: There are a few competitors such as PayPal and Intuit but the FinTech industry is growing fast and there is definitely room for competition to thrive. This article from Globe News Wire states the global Fintech Market is expected to continue to grow by a CAGR (Compounded Annual Growth Rate) of 23% through 2025.

Management: Jack Dorsey is the CEO, Chairman, and Co-Founder of Square which went public in 2015 and currently has a market cap of $112B. Prior to Square, Dorsey also co-founded Twitter in 2006, which went public in 2013, and currently has a market cap of $54B. Creating one tech unicorn is impressive but creating two tech unicorns is incredibly rare. Dorsey will most likely continue to lead Square with the release of innovative new technologies that are well monetized. 

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

 

Revenue (Found on the Income Statement)

2017:  $2.2B

2018:  $3.2B

2019:  $4.7B

2020:  $9.4B

Revenue growth in 2020 was incredible.

 

Net Income (Found on the Income Statement)

2017:  -$62M

2018:  -$38M

2019:  $375M

2020:  $213M

Net Income has significantly increased in 2019 but has fallen off in 2020. This has caused the EPS to decline.

 

EPS (Found on the Income Statement)

2017:  -.17

2018:  -.09

2019:  .88

2020:  .48

EPS has declined in 2020. It’s still significantly higher than 2018 and 2017 but this is worth keeping an eye on. When the next quarterly and yearly statements are released, we do want to see increasing EPS numbers which will reflect a larger MOS.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $101M

2018:  $232M

2019:  $403M

2020:  $243M

Free Cash Flow has decreased. This is worth keeping an eye on as well.

 

Total Assets (Found on the Balance Sheet)

2017:  $2.1B

2018:  $3.2B

2019:  $4.5B

2020:  $9.8B

Total Assets have increased which is a good sign.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $1.4B

2018:  $2.1B

2019:  $2.8B

2020:  $7.1B

Total Liabilities have increased significantly. This is also worth keeping an eye on as well.

 

Total Debt (Found on the Balance Sheet)

2017:  $631M

2018:  $1.7B

2019:  $2.1B

2020:  $3B

Total Debt has increased significantly. We want to see these numbers decrease when the next financial statements are released.

 

Total Equity (Found on the Balance Sheet)

2017:  $786M

2018:  $1.1B

2019:  $1.7B

2020:  $2.6B

Total Equity has increased which is a good sign.

 

When looking closely at the financial statements, we can see why the score is 11/20. There is room for improvement. The EPS has declined which is why the MOS is sitting at 56%. You may have noticed this stock in my portfolio. I’m going to keep investing in Square primarily because of the Meaning, Moat, and Management. FinTech is a high demand industry and Square is well positioned to grow in this industry over the coming years. With the Moat, I do see the competition but based on the growth of the FinTech industry, there will be a lot of winners including Square and PayPal. With the Management, Jack Dorsey has proven to grow large tech businesses over the last 15 years. He’s well connected and respected in this industry and has the resources available to continuously drive business growth.


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