"Plunging" is relative

I keep seeing this thread about Square “plunging”. I think a little perspective is in order.

At $86 Square’s stock is “almost all the way” down to where it finished on Friday Sept 21, just two weeks ago, is considerably ahead of where it was at the end of August, and is still 20% ahead of where it finished two months ago. This is not the end of the world here. That’s hardly “plunging”. Just saying…

Saul

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This is not the end of the world here. That’s hardly “plunging”. Just saying…


Agreed, this is more indicative of Square having gotten ahead of itself.
Getting ahead of itself was a confluence of multiple analyst target raises in succession all coming at about the same time as the market having been reaching some all-time highs (maybe not quite all 3 of the NASDAQ, Dow, and S&P 500 reaching highs simultaneously, but not too far apart).

Square’s acceleration of adjusted revenue growth rates remains quite impressive, but the P/S ratio had gotten a bit out of hand…especially when considering that the adjusted portion of the revenue is the far more relevant part, with the other part of the revenue being simply pass-through (a la Nutanix hardware).

Technical analysis is not part of this board’s forte or what gets discusses here at all, but just look at the Square chart for the past 3-5 months (or longer) and ask yourself if such a steep rise made a ton of sense or had any hope of continuing?

61% year-over-year adjusted revenue growth after 58% or something from the prior quarter is definitely quite nice, but a 30-40% share price rise within only 2 months or less is a bit too much for even that very nice acceleration.

-volfan84
long SQ as my #4 position (behind NVDA, MDB, & TTD)

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We always think there is something wrong when the stock “plunges” as well. Sure there is information in share price and its movement, but I think we over think this sometimes. Has anything changed with Mongo, as an example, since it has plunged now down to $68 and change? Seems that it may be a better value for the same reason we invested in it to begin with that it was at $80. Then again perhaps competition with Microsoft is eating away at Mongo in contrast to management’s statement that they do not see any real alternative competition when going for enterprise business.

Management did comment, and this is anecdotal of course, that they have had at least one customer (and this may have referenced more than one, I do not remember) switch out of Azure’s Cosmo due to lack of functionality.

At this point in time every NoSQL out there lacks functionality in comparison to Mongo. You go with another NoSQL if you have very specific needs that the alternative products can equally or better meet. But if you want a true general purpose database that is NoSQL you go with Mongo.

But we can always wonder, is the stock price fall related to Mongo losing competitive positioning…or perhaps we can just stop thinking too much.

I don’t know, let me know.

Tinker

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Oh, and I forgot to mention, at yesterday’s close, after the “plunge”, Square was up 148% year to date, not up 48%, up 148%!

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I couldn’t agree more, Saul. The price just got ahead of itself and may need to consolidate for a while, but I see no reason to dump Square.

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Saul-

how do you square the ‘credit risks’ of Square?
How would you watch for that?

tj

Just,
Not Saul, but I’ve been pondering this question since Mr. Palmer got so much attention recently asserting the credit risk for SQ was substantial and exacerbated with their venture into consumer installment loans.

First, it’s worth noting that Mr. Palmer has held bear position on Square for about a year now, his price target is $30. So, it’s not like he suddenly formulated this position due to recent announcements by Square. But, setting that aside . . .

To assess the ‘credit risks’ for Square, one must first assume that there actually are some. I wrote a post a day or two ago asserting exactly that. Butm I’ve come to understand that their credit risk is not negligible, but quite small. First, in that they have a very good understanding of the borrowers, their loans tend to be high quality to begin with. Next, they generally do not hold their loans for long. They bundle them and sell them thereby producing profit and cash flow while simultaneously disposing of the risks associated with the loans.

Mr. Palmer asserted n his latest piece that the loan buyers are fickle and that the market for loans may dry up with a market downturn. But, in that Square’s loans can be shown to be of high quality they have little trouble selling them profitably. Even in a downturn, high quality loans can still be sold, maybe not quite as profitably, but they can still be sold. But, let’s say that they aren’t as easy to turn as quickly as before. The possibility of suffering some defaults is certainly present, but people with good credit tend to protect their credit. I know, I’m one of them. So we can expect the default rate to be very low. It seems to me that the most likely negative outcome is that Square holds their loans for a longer period and collects installment payments rather than selling the loans outright for a lump sum. Yes, that will impact cash flow, and as a result Square might tighten up their lending practices for a while.

But, I just don’t see a very serious risk. When you lend money, there’s always some risk, that can’t be denied, but I just don;t see a bleak picture as Mr. Palmer does.

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“First, in that they have a very good understanding of the borrowers, their loans tend to be high quality to begin with.”

Why would they have a good understanding of the borrowers? They have good data on the sellers, not so much on the customers who will be getting the loans. In Square’s own words it’s intended to enable selling/purchasing larger items like house renovation work. How would you know anything about the guy buying a roof job from your seller?

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I’m agnostic about Square’s new lending platform. To date I like the company and think that it has a good head on its corporate shoulders, so I don’t see the move as a negative.

I needed a place to express my shock at my “plunging” portfolio. I look forward to needing a place in the coming days to express my joy at my rebounding portfolio. But for this moment, I’m in a bit of a shock.

I do follow the cardinal rule of not investing money that I need. Therefore, this too shall pass. Unlike Saul, I suffer from not be able to sell low. I’m still hanging on to PVTL even though it’s quite down since I bought it. However, it now looks quite similar to all of the stocks in my portfolio. Saul has a genius ability to let go even at a loss so that he can make better use of his money elsewhere. I’m unable to hit the trade button when I’m losing. I need to continue to marvel at Saul.

This means that I will not be selling anything. However, this is my first time since I took my portfolio out of management that I’m “plunging”. It’s not pretty.

Saul, thank you for pointing out that plunging is relative. Ok, enough bandwidth wasted.

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Credit risk is a banking question, I thought I saw that SQ was organizing a bank.

This is an area of tight regulation. There are annual business operations and quality audits by the regulators.

Losses are unlikely to be an issue worse than credit card portfolios and it seems likely that the projected fraud - a huge source of loss for consumer credit, would be lower. The cost of origination may well be lower as the service nature of the transaction for their sellers could reduce expense for loan creation costs and fees.

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OK, maybe not super very good, but they keep a record of every Square transaction made against each CC# and link it to a customer record, so they know more than just what they gather from credit reporting agencies.

The first Square transaction I ever made requested my email and phone. If I recall correctly, it was required in order to complete the transaction, but maybe it was optional. In any case I get receipts for purchases with Square vendors who never collected the information, so it must be linked via my CC#.

Next time I transact with a Square vendor, I’ll use a different CC to see what happens.

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