Initial Notes on Square

A week or so ago, Bear posted he had initiated a position in the payments solution company Square. Since its a sector I’m extremely interested in (fintech) and a company I’ve been meaning to researchmore, I thought I would use his interest in the company as a catalyst for my own due diligence. Here are some of my initial thoughts and notes:


Revenue (millions)		Q1		Q2		Q3		Q4	
2014										250
2015				374		310		332		374
2016				379		438		439

Adjusted Revenue (millions)	Q1		Q2		Q3		Q4
2014										82
2015				89		111		118		135
2016				146		171		178		

EPS (diluted) 			Q1		Q2		Q3		Q4	
2014										(0.25)	
2015				(0.34)		(0.20)		(0.35)		(0.34)
2016				(0.29)		(0.08)		(0.09)

Current (2016 Q3 Earnings):

Revenue Growth (millions)
2015 Q3 TTM Revenue = 1266
2016 Q3 TTM Revenue = 1630
Year Over Year TTM Revenue Growth = 28.75%

Adjusted Revenue Growth (millions)
2015 Q3 TTM Revenue = 400
2016 Q3 TTM Revenue = 630
Year Over Year TTM Revenue Growth = 57.5%

EPS Growth (diluted)
2015 Q3 TTM Earnings = (1.14)
2016 Q3 TTM Earnings = (0.80)
Year Over Year TTM EPS Growth = NA

P/E (Check Current Price) = NA

1YPEG = NA

Notes:

• Square started in 2009 to enable anyone with a mobile device to accept card payments, anywhere, anytime. Have since added several services including analytics, payroll, marketing, lending, etc.

• According to Bert, adjusted revenue is what’s left after Square pays back the credit cards their cut of the transaction. Once I confirm this, there will be no need to track revenue going forward.

• Seems to mostly target small/medium businesses as customers

• Sells hardware at a loss to customers. Most hardware sales take >12 months of use by customer to become profitable. Because of new EMV requirements, hardware sales skyrocketed this year so Square took more losses than “normal” this year.

• Expected to be GAAP profitable by 2019. That might be conservative? They have already produced free cash flow of >$60M over past twelve months.

• Competitors in companies accepting credit card payments via mobile devices include PayPal, Intuit, and Stripe (private). PayPal and Intuit can undoubtedly undercut Square on price. Intuit charges 2.4%/swipe, PayPal 2.7%/swipe, Square 2.75%/swipe.

• It should be noted that according to the WSJ Stripe was recently valued at $9.2B in a private funding round which is almost double that of Square’s market cap. While this, in and of itself isn’t worrisome, what I found most troubling was this quote:

Stripe is approaching Square’s payment volume but hasn’t eclipsed it yet, according to a person familiar with the matter. However, Stripe is growing much faster than Square’s expected growth rate of 40% this year, this person said. Square said it processed $13.2 billion of payments in the third quarter.

From http://www.wsj.com/articles/stripes-valuation-nearly-doubles…

I just wonder what Square’s moat is if Stripe is growing faster? What makes Square so much more special than PayPal’s, Intuit’s, or Stripe’s offerings in this arena?

• Square Capital, it’s business loan platform, saw 70% YOY revenue growth. Charges super high interest rates. Customers keep going back because its convenient.

• Lucrative instant pay feature. For an extra 1%, merchants can make deposits same day (same time?) as they receive the payments. This is basically a 2-3 day guaranteed loan for Square that it can earn an extra 1% on. Nice!

• Acquired restaurant delivery service Caviar in August 2014. Has not released numbers on Caviar yet, but says weekly order volume has increased elevenfold since its acquisition.

• Bert Hochfeld, one of our favorite Seeking Alpha writers around these parts, is notably bullish on the company. Here is how he defines Square’s moat:

The little card readers, the POS terminals, and certainly the software are not really high tech offerings. Even the services that are offered are not unique. It’s the combination of all of these services, available in one place at a reasonable price that is the secret sauce and the budding moat for Square. The company has launched Build with Square, a developer platform that allows users to find custom solutions that fill requirements unique to their business. It is difficult for many users to find alternatives that provide the solutions they want in a single place on a single platform at a reasonable price.

From http://seekingalpha.com/article/4018675-square-making-paymen…

I’m going to be honest, this struck me as a little weak? I can’t imagine PayPal and Intuit not offering the same if not more. And while I know precious little about Stripe, I would imagine it fits this bill too?

Just checked. Even more traditional payment solution businesses probably offer all of the above. See their mobile solutions which is Square’s bread and butter: https://www.globalpaymentsinc.com/en/us/accept-payments/mobi… and http://tsys.com/solutions-services/merchant-solutions/mobile…

• Keep in mind its not profitable. Lots of potential but I would want to understand its moat better before making it anything more than a speculative position in my portfolio. But that’s just my initial take after doing some preliminary research. There is much more for me to read and learn about the company. Just passing along my notes for now.

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

25 Likes

Great write up!

Having recently been burnt by Monitise (MONI), which operated in a different and more general space of the same payments processing industry, I also share the skepticism. That said, Square has created a clear opportunity and the right pedigree