I understand the limitations of P/S, and also that not everyone on this board is price-sensitive. I’m trying to get in the ball park on how expensive SQ is, and the different moving parts is testing the limited reach of my pricing skills. I was wonder if any veterans here can help me understand the stock better.
2018 Q2 TTM Revenue = 1232
TTM subscription and service = 375
TTM Adjusted Transaction Rev = 800
with a market cap of $27B that would imply a P/S of ~22
This is not particularly unreasonable compared to other Saul stocks, but I wonder if you did a sum of parts, would you put the same multiple on subscriptions as you would the transaction processing?
Taking some pretty rich multiples (IMHO), if you say you’ll pay 25x trailing revenue for the subscriptions, and 12x trailing revenue for the transactions, the stock would be $48.65 making the current ~$70 price tag look pretty steep.
The reason I personally don’t look at P/S is that I aim to invest in the best businesses I can find. These businesses tend to lead the markets they are in and more importantly for this conversation, create new markets we never even thought of.
If Square only ever stayed in the markets they are in with the products they have. Sure, probably over-priced.
I have a hard time making the argument that SQ won’t be bigger than Visa and Mastercard (currently) in the future. That’s a good 8-10x market cap increase from here.
If/when that happens, I won’t care if I bought it at a p/s of 10 or 25.
But I will care if I never bought it because the P/S was “too high”
there are lots of smart people in the stock market so P/S tends to represent a consensus of growth investors . It would take a lot of luck or super insight unshared by others to come up with something a lot better. Exceptions might be a longer time span than pros who mostly work Q to Q, buying during a FUD storm or deep in a bear market. Look at AAPL, no high P/S 10 years ago could have made it too expensive for a longterm holder. Wish I had kept my shares.
I’m so glad I kept my shares of SQ. Some members may remember my first posts asking what to do about my 35% SQ portfolio allocation (it grew to that size from around 15% in about a yr). I decided not to trim and to continue holding them - why not-I have more to lose by trimming than keeping the share imo… I’m guessing it will soon grow into the 40% allo. range within another year while my other investments try and keep up. I’m resisting the urge to buy more SQ-especially with the current volatility as I don’t really need more.
2018 Q2 TTM Revenue = 1232 TTM subscription and service = 375 TTM Adjusted Transaction Rev = 800
with a market cap of $27B that would imply a P/S of ~22
I get a much lower P/S. Revenue from the last four quarters is 2.685B. 27B market cap. That equals a PS of 10.05. Projected revenue for 2018 is 3.2 billion. With one and a half quarters to go in the year we hope that’s accurate. That gives us a 2018 PS of 8.44 at the current market cap. If I did anything wrong in that calculation please correct me.
I used total revenue I think you used adjusted Revenue. It’s my understanding that total revenue is what is used when calculating P/S ratio. Correct me if I am wrong. Thank you.
You definitely need to use adjusted revenue with regards to Square due to pass through revenue.
Million of dollars pass through square between their customers and visa\mastercard. Unfortunately, square has to count this as revenue even though really the money is never theirs. So they adjust it away to give a more realistic number (eg. Just use the ‘cut’ they get for processing the payments).
The “adjusted revenue” piece is one reason I give SQ an asterisk on its PS ratio of 22. Their adjusted revenue is the difference between transaction revenue and transaction costs. So what’s left is 100% gross margin revenue. You won’t find that anywhere else. This Q:
Trans Rev: 625,228,000
Trans Cost: 395,349,000
So the difference was 230m of their 385m adj rev. (60% of total revenue)
But it was also 230m of their 315m gross profit. (73% of gross profit!)
When some high-margin companies grow revenue by $1m, gross profit grows by $750,000 or $800,000. When Square grows adjusted transaction revenue by $1m, Square’s gross profit grows by $1m.
I’ve made a bigger deal about the high margin and incredibly fast growing services revenue than anyone – and it’s growing incredibly fast, and is awesome. But don’t snooze on the transaction revenue story.
Square is truly firing on all cylinders. (My girl Sarah Friar gets things done.)
When some high-margin companies grow revenue by $1m, gross profit grows by $750,000 or $800,000. When Square grows adjusted transaction revenue by $1m, Square’s gross profit grows by $1m.
That wouldn’t be accurate. The difference between total and adjusted would be the pass through revenue to the payment companies like VISA/MA, etc. Adjusted revenue still has costs of doing business beyond that like providing card readers to people, hosting, servers, support, employees, etc. If you use adjusted revenue for measuring gross margin it may result in gross margins greater than the total company margins and they may approach somewhere near what Software Companies normally do (70%-90%) but it’s not 100%. To my knowledge they don’t report adjusted gross margins, maybe they do, but I guarantee they have some sort of cost of doing business that isn’t pass through revenue to Visa.