Today I was talking to a friend who’s been getting interested in investing and I just opined: “Wow, Square is getting expensive!” He rightly responded, “You don’t think it could be worth far more one day?” I said, “Wow, good point. I didn’t mean that at all. I just meant that the PS is high at present. I could definitely see Square someday being worth several times what it is today.”
A year and a half ago I wrote a post summarizing Saul’s “Modified Buy and Hold” (MB&H) approach: http://discussion.fool.com/modified-buy-and-hold-32203068.aspx
Please don’t scrutinize it too closely. As mnadel pointed out, my percentage numbers were off (I underestimated). But the idea was that MB&H is simply about considering the short term AND the long term. My conversation this morning got me thinking, is it time to trim Square (which grew at 41% last quarter and has a PS ratio of ~16) and add to something in my portfolio that’s “cheaper?” The idea is that if growth is steady, something cheaper might have more room to run.
Growth rate: The key to modified buy and hold
Square grew adjusted revenue at 39% in the March quarter. In the June quarter that ticked up to 41%? A trend? This may come back to make me look stupid, but I’m going to way out on a limb and say that for the September quarter I expect them to grow revenue at 45%. Why? http://discussion.fool.com/would-you-be-interested-32798819.aspx…
Square literally has a segment that is growing faster than Shopify! And last quarter it was almost 25% of adjusted revenue. This is a tail that can definitely wag the dog.
But back to MB&H, I think this is a huge factor. 40% growth is super. Does it mean the company’s PS ratio should be 16? Probably not. There are several companies growing at that rate trading with PS at more like 9 or 10. HOWEVER, if that growth rate is increasing…look out. Square’s services business is one reason I believe growth rate is increasing. They’ve also been adding a ton of new things, and adoption by merchants has been great too. There’s good reason to think they’ll grow even faster than they have been…and do it for some time.
Does that mean the PS should be 16? 20? 13.75? Who knows. I just believe it will be a good bit lower after earnings come out on 11/8, because I believe Square’s growth is accelerating. And I think that’s an important concept to grasp with MB&H.
who didn’t trim Square today