Is it too hip to be Square? I dare...
Key Stats for Square Inc
| Ticker | SQ |
|---|---|
| Sector | Application Software |
| Latest price | $23.47 |
| Value | $8,778M |
| Daily vol | $245M |
| Date | 14 June 2017 |
| Links | Yahoo Finance, SEC Edgar, squareup.com |
1. How do they shape up?
Square, Inc. is a commerce ecosystem.
Gawd ... Silicon Valley types! The CEO is Jack Dorsey, also CEO of Twitter.
What they mean is, SQ is a payments company, specifically point-of-sale terminals, etc. Their software, and hardware let business take card payments. But you probably know that, as you'll have seen their brand, which incidentally isn't a proper square, in a coffee shop near you!
Though, as with all payment businesses, it's more complicated than that, as Square's clients need invoicing tools, the ability to take payments online, and manage charge backs and fraud. Square helps on all fronts. And recently, they've even launch a consumer business: Square Cash, letting people send money to each other.
Plus they bought an online food delivery app called Caviar. What? Why are they any better than UberEats, Deliveroo, or GrubHub?
Are they unique?
They'd like to think so, but there are clearly lots of alternatives. This doesn't feel like a winner takes all market! Here's how they describe their competition:
(We) focus on building products and services that are cohesive, fast, self-serve, and dependable.
For payments and point-of-sale services, we compete primarily with traditional acquiring processors and payment processors who sell costly card terminal and point-of-sale systems, often tied to long-term contracts, through direct sales or Independent Sales Organization (ISO) channels. Many competitors offer payments and point-of-sale services that have features tailored to particular industries or business types but require sellers to stitch together technology from multiple hardware, software, and payments vendors.
Recent financials
From a financials perspective, the top line's growing, but where's the cashflow!
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue | $0.2bn | $0.6bn | $0.9bn | $1.3bn | $1.7bn |
| EPS | -$0.71 | -$0.82 | -$1.08 | -$1.24 | -$0.50 |
Though it isn't really as bad as that, or so they say, with an adjusted EPS of +$0.04 a share last year. They get to an adjusted profit by ignoring the $48m patent settlement that had to pay and ignoring the stock option expenses.
Oh, and yes, they have cash on the books, so the balance sheet looks fine, but don't expect any dividends or buyback soon. Quite the contrary, expect dilution from all them options.
2. How do they compare?
There's no good peer for Square, or at least no exciting one. It's competing with Verifone and other POS companies like Ingenico. But their margins aren't exciting.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Square Inc | $1,791M | 0% | -17% |
| Equipment & solutions | |||
| VeriFone Systems Inc | $1,880M | 10% | -17% |
| Ingenico Group SA | €2,312M | 20% | 15% |
| Shopify Inc (US) | $444M | -6% | -13% |
| Fiserv Inc | $5,568M | 35% | 35% |
| Global Payments Inc | $3,870M | 21% | 12% |
| Cards & transactions | |||
| Visa Inc | $16,829M | 68% | 17% |
| Mastercard Inc | $11,064M | 57% | 75% |
| American Express Company | $32,517M | 25% | 24% |
| Paypal Holdings Inc | $11,273M | 21% | 10% |
And when it comes to valuation it's worth more than Verifone and Ingenico put together.
With no cashflows of note or dividend, we'd have to dream up a rosy future... or rely on price to sales. So at 5x sales it's a fraction of Visa and Mastercard, but inline with Paypal.
I don't get it! Though I clearly didn't get Shopify either.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | Price to sales |
|---|---|---|---|---|---|
| SQ | $8,829M | -125x | 20% | 0% | 5x |
| Equipment & solutions | |||||
| PAY | $2,041M | 14x | 1% | 0% | 2x |
| INGC.PA | $4,916M | 17x | 7% | 2% | 2x |
| SHOP.K | $7,388M | -610x | 25% | 0% | 18x |
| FISV.O | $26,161M | 24x | 12% | 0% | 6x |
| GPN | $13,647M | 23x | 18% | 0% | 4x |
| Cards & transactions | |||||
| V | $215,580M | 28x | 17% | 1% | 14x |
| MA | $129,440M | 28x | 15% | 1% | 12x |
| AXP | $71,654M | 14x | 7% | 2% | 4x |
| PYPL.O | $62,658M | 29x | 17% | 0% | 5x |
3. Wall Street thinks?
And I don't get Wall Street! They say Buy but the consensus target price is $21, 10% off the current price.
And the Point is?
Sure the market's a fan, recently. 1Q results at the start of May, and an investor day at the end of May, has seen the stock ramp from high teens to mid twenties. But sales forecasts ain't up, and Square's expected to lose money in 2017 and 2018.
I don't mind losses for high growth businesses, but Square isn't accelerating it's sales. It'll add $400m this year and next, but that's all it grew last and the year before. This is no Google, Facebook, Amazon, Netflix, or even an early stage Twitter.
Payment systems, in particular transactions, is hard. And it exists already, with a lot of legacy installled at businesses and in consumers.
But for me, the final nail in the coffin, was the investor day... they felt the need to have an Investment Thesis section. Call me old fashioned, but aren't companies supposed to explain their businesses, not opine on their share price!
Sorry, I ain't comin' round. They're square as far as I care.
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author notes: u/shane_stockflare is a Chartered Financial Analyst.
Submitted June 14, 2017 at 05:14PM by shane_stockflare http://ift.tt/2riaRYx
