3 Concerns for Square Shareholders

My latest article focuses on a few things I believe SQ shareholders should be watching in the upcoming year. Again, I like SQ. I do. But its has a high valuation and there a few concerns I have. Largely excluding the high valuation, here are those concerns:

Square Inc (NYSE:SQ) investors had a wild ride in 2016. Last January, the company’s stock opened at $12.75; in June, shares regularly traded under $9. But they recovered to highs near $14 in the final trading days of the year.

More important for long-term investors than the daily fluctuations of the stock market, however, are a business’s fundamentals. Fortunately for Square investors, there are plenty of encouraging signs. While the company is not yet profitable on a GAAP (generally accepted accounting principles) basis, other metrics show consistent growth across the company’s many platforms. In Square’s 2016 third quarter, the company reported $178 million in adjusted revenue, a 51% increase year over year. The company’s gross payment volume (GPV) was $13.2 billion, a 39% increase year over year. If Square can continue these trends, 2017 could be another winning year for the company’s investors.

This doesn’t mean there aren’t clouds on the horizon, though. Besides a lofty valuation for a company not yet making a profit (approximately 112 times trailing free cash flow), here are three potential causes for concern by Square investors in 2017.

Read the entire article at http://www.fool.com/investing/2017/01/24/3-concerns-for-squa…

The three concerns I outline are:

  1. SQ’s margins are already pretty low for their bread-and-butter payments service, but they have expressed a willingness to “customize” pricing for larger customers. Will these deals lose them money? Before you discount the notion, remember that Square entered into a multiyear deal with Starbucks in 2012 that was a huge money loser for them.

http://money.cnn.com/2015/10/15/technology/square-starbucks/…

  1. Offering Square Capital to non-SQ customers. Square Capital is Square’s microlending platform to small businesses. SQ has been hugely successful with this and the program is very lucrative. But the primary reason for this is that SQ has so much data on their business clients because all credit/debit card transactions go through SQ. I SQ starts offering this lending to non-SQ customers (which they have hinted they might do), the default rate would almost surely go up to industry normal levels. If this happens, this platform won’t be nearly as lucrative.

  2. Jack Dorsey. I get that this one is far more subjective, but I don’t like how he’s done with Twitter and I don’t like that he’s now splitting time between SQ and Twitter.

Just my thoughts.

Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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Thanks, Matt. Good points all around. As a shareholder, I agree it would be concerning to see another Starbucks type deal. I don’t think they’re going to lose with Square Capital, but opening it up might not allow for the same margins on the new business. As for Dorsey, I agree he’s a much better founder than manager. Hopefully he’s got the right people around him at Square.

Bear

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