Great discussion here on SQ.
Bjurasz,
That article is not saying SQ is The Motley Fool’s “One stock to buy in 2019”. That is an article on TMF’s free side and would indicate that it is the author (Daniel Sparks) One stock to buy in 2019.
TMF’s free side and premium (paid) portfolio’s are completely different, with mostly different people involved. Not taking anything away from that author, but wanted to make an important distinction.
Larger sellers are coming to Square
Finally, one way Square could keep up an uncanny growth rate in 2019 is with the company’s momentum with larger sellers. Though Square initially gained popularity by catering to small businesses with easy-to-use payment processing tools, the company has since expanded to more comprehensive offerings that are attracting larger sellers.
To that end, 24% of Square’s gross payment volume in its third quarter came from sellers with $500,000 in annualized gross payment volume (GPV) or more. That figure was up from 16% in the third quarter of 2016 and 20% in the third quarter of 2017. Furthermore, Square said in its third-quarter shareholder letter that GPV from sellers with $125,000 or more in annual sales was up 41% year over year, while overall gross payment volume increased 29% year over year.
That’s very telling to me. They are bragging about sellers with $125,000 in sales PER YEAR! Do you realize how truly tiny that is. That’s $10,000 per month! $31,000 per quarter!
And their big, BIG, customers have sales of a half a million a year. Would you buy stock in a company with a half a million in revenue per year, $0.125 million per quarter. Square’s real big companies wouldn’t even qualify as “companies” to us. That’s why I say that Square is in a tiny niche.
Saul
The flip side, though Saul, is that there are lots and lots and lots of tiny businesses. If their classic customer was the farmer market vendor who would do maybe $100 a week in sales (most cash) over 6 months, that is only $2600/year. Each half million customer is 192 of those farmers market vendors. To be sure, even bigger customers provide even more traffic, but pretty soon you get into realms where Square is not likely to be able to compete.
Interesting discussion on SQ.
I do not see them as a tiny niche player. Payment is only one part of their business and a large number of small vendors/customers can really add up (think NFLX). I am seeing their system everywhere, even in a fish market in Africa. Everyone seems to like it!
In essence, the business is innovating and executing well, growing quickly and competition coming in. The CEO is behaving strangely but perhaps he is not normal in our sense of normal, the man runs two companies and more so after their superstar CFO left for a not so spectacular deal, did she see something?
Like with SHOP, I am staying with my SQ allocation, at least until next couple of earnings. I believe we will see it recovers quickly.
the farmer market vendor who would do maybe $100 a week in sales (most cash) over 6 months, that is only $2600/year.
Hi tams
The farmers’ market salesmen I see drive to the market in trucks full of produce from neighboring states and probably do $200 an hour for 8 or 10 hours ($1600 to $2000 a day, not a year), stay overnight and come back and sell off the rest of their produce the next day, and drive back in the evening and stock up again. Maybe $8000 a week for six months (average). That’s $208,000 per year, not $2,600). And for all I know they have an additional truck that goes into Philadelphia or Boston. Square is dealing with really small guys, people who will go to once a week or once a month local markets to sell handcrafts, for instance.
Best,
Saul
But, from my experience, the vast percentage of farmer’s market sales are cash, so the Square piece is only the additive part that moves to plastic. And, perhaps my experience with the Point Richmond farmer’s market and the Urbana farmer’s market is on a more modest scale. The latter opens at 7:30 and by 10:30 most people are sold out and pulling up stakes. And, it is one day a week. I don’t think they are doing $8000 or even $2000 worth of total business in 3 hours, much less that much in plastic.
Hi Saul,
You hit my one concern, Sarah leaving early. I also tend to avoid goofy CEOs, and Jack seems to be plenty odd.
That said, revenues are increasing. The customer base is expanding to larger customers. Square has reapplied to be a bank, which will reduce financing costs. Square cash serves the unbanked, which, according to McKinsey, is half the world’s population. Maybe TAM and expansion opportunities counteract recessionary pressures, and the US economy still remains strong.
https://www.mckinsey.com/industries/financial-services/our-i…
I have a hard time selling when business seems to be improving.
Jason Mosure during his financials podcast and during the Market Foolery podcast has been discussing the possibility of Square being taken over, possibly by Apple. This is just his SWAG at what could happen in 2019. The only reason that I could think of for Sarah to leave early, even if she loved the company, would be a takeover. It wouldn’t be the strangest thing I have seen.
As for me, I’d have to see business worsening before I bail on SQ.
Best,
bulwnkl
As for me, I’d have to see business worsening before I bail on SQ.
Hi bulwinkle, I didn’t bail on SQ. Some things made me very uncomfortable so I reduced my position. Seems pretty reasonable to me. I hope they keep going up since I have almost a 3% position, and since lots of board members are invested.
Best,
Saul
PS, What got me on Sarah was she was staying for the transition, and then oops, she’s leaving tomorrow, or something like that. Just seemed VERY strange.
I am with you on the strangeness of Sarah’s leaving. I am a fan of hers. Someone posted that Sarah was interviewed and remained highly positive on the company. Sorry, I don’t remember the reference. I hope her exit is not a harbinger or things to come.
Best,
bulwnkl
Sorry, just got back from a long day at work.
As stated in the table, I have used Non-GAAP info from the latest quarterly reports - it’s more manually intensive, but more useful for my purposes. The NTM data tends to be from billings information in the conference calls.
There is an argument that GAAP earning would be a “more accurate” picture, but for the metrics I’m most interested in, it is the YoY non-GAAP growth that sheds the most info for me. Your mileage may vary.
Hi, Tchalla-
Thanks for the info. As far as Non-GAAP vs. GAAP profit is concerned, which one is used by the analysts following the stocks? That’s the one probably the market will measure the company performance against.
However, the difference is more than that, i.e., GAAP vs. non-GAAP. Here is what I got from ESTC’s last 10Q report:
Periods REV GAAP_Profit GAAP_Margin Non-GAAP_Profit Non-GAAP_Margin
3 Mon ended Oct. 31, 2018 63,575 44,988 71% 46,629 73%
3 Mon ended Oct. 31, 2017 37,038 28,078 76% 28,597 77%
6 Mon ended Oct. 31, 2018 120,219 86,075 72% 88,979 74%
6 Mon ended Oct. 31, 2017 68,682 52,308 76% 53,282 78%
The differences between the GAAP and the non-GAAP margins are small.
Here are the numbers from Yahoo (and used in my modeling):
REV = 211.47 M (TTM)
Gross_Profit = 119.19 (TTM)
The profit margin is ~56%, significantly smaller than the above ones, albeit it is for the past 12 months rather than 3 or 6 months. Not sure the source of Yahoo’s numbers.
I will update my modeling using the profit margin from your table.
Best,
Klay
I certainly can understand the thinking that it would appear the CFO left for strange reasons, but I only know what I know and cannot assume too much. Will continue to hold my 7% stake until I see business fundamentals deterioration or somethin* else.
John
But, from my experience, the vast percentage of farmer’s market sales are cash, so the Square piece is only the additive part that moves to plastic.
At my local Farmers market, it seems the majority of farmers are using Square, or PayPal. I ask them what they are using. Most use Square.
I’m long on Square. I may add to my position. We shall see.
And, mazske is following this board and slowly selling a bit and buying and adding to various companies discussed here.
Fool on,
mazske
All positions are listed in my profile
Square is dealing with really small guys, people who will go to once a week or once a month local markets to sell handcrafts, for instance.
SQ has been moving up market. Below is the GMV mix for the past 7 quarters.
GMV
(<$125K) ($125-500K) (>$500K)
63% 26% 11%
57% 28% 14%
52% 27% 20%
53% 27% 20%
53% 27% 20%
50% 28% 22%
48% 28% 24%
SQ’s growth has been accelerating for the past 5 quarters.
SQ is now profitable although they will spend more in 2019.
I think SQ’s stock could have dropped for the following reasons:
If you just look at the growth numbers, it’s not a clear sell. Saul usually looks at the numbers. I haven’t sold any but I’ve found that about 75% of the time when Saul sells something, it was in hindsight a good decision. The next earnings call is on February 27th. I was planning to see how the company does before I see any shares.
Chris
Though I wouldn’t usually just post a link to a news item here, it is worth noting that SQ has a new permanent CFO from Activision Blizzard
Should help with one dimension of the uncertainties going forward
https://www.cnbc.com/amp/2019/01/03/square-hires-amrita-ahuj…
Sarah Friar:
Maybe she just wanted a CEO job
Maybe she felt like she could do more for the world as boss of nextdoor. She’s always been quite passionate about promoting women in business: this seems an extension of that - building quality neighborhoods
Maybe it’s a slower paced role so she could spend more time with her family.
Maybe she had an affair with Jack or someone else, and so they agreed for her to leave before it comes out and tarnishes the reputation of all involved.
Who knows. I do know that quite often what is revealed is not the true story.
But Jack and Sarah seem to still really like each other. Jack just tweeted a photo of them going out for Mexican and tequilas. So doesn’t seem to be any bad blood there.
I do think Sarah’s eloquence contributed to SQs meteoric rise and subsequent fall when it was announced she was leaving. The price is where it should be now I think.
Following the numbers, SQ is killing it. Amazing optionality, accelerating numbers, and more reasonable valuation metrics than some of the other companies discussed here. And that’s maybe because it does have competition. Sarah always stated their target was the unbanked, underserved - their niche so far which has allowed them amazing results with little competition.
Recession. It will hit everyone. Nothing new. I did like how Sarah pointed out that they repackaged and sold their loans onwards to minimise risk. That showed very good diligence. The loans they make won’t cause cash flow problems in the event of a recession.
I’m with Chris here. But Saul and his time machine (gut, intuition, whatever you want to call it) have proven time and again to be pretty spot on, selling and moving on at extremely appropriate times, and not price anchoring. Holding, but next quarters earnings and CC will be watched and analauded closely!
Chris just posted the last 7 quarters of GMV for SQ customers.
1 year ago quarter, 20% of merchants >$500K
Last quarter, which had GMV grow 29%, merchants > $500K were 24%
1.29 * 0.24= .31
.31/.2 = 1.54
merchants > $500k grew 54%
On the low end, merchants < $125K
1.29*.48=.619
.619/.52 = 1.19
merchants < 125K grew 19%
SO merchants >$500k grew over 2.5 times faster than merchants <125K
They are clearly moving upstream, but as Saul points out, a merchant of $500K/yr is still pretty small.
The market seems to like the new CFO, SQ up 10% today. Looking at her background there is a lot to like.
Since the new CFO, Amrita Ahuja, had parents move here from India (and Africa I believe), maybe this will help SQ expand to more markets worldwide.
as SQ moves more upstream, they should be able to sell more services to each customer which makes each merchant more profitable. (we are seeing that as GMV grows 29% and revenue grew 68% last Q)
Jim