SQ - analyst meeting

I was thinking of cutting SQ but the following analyst meeting made me pause:

https://jpmorgan.metameetings.net/events/tmc19/general_signi…

It is really worth a listen. Some things I gleaned:

  1. SQ has only 2% of the total GPV of sellers with annual GPV >500k. By my calcs they have 10% of the total GPV of sellers with annual GPV <125K. SQ’s GPV of the larger sellers is growing at 50% yoy while the smaller sellers GPV is growing at 20%. The in-between seller GPV (by my calcs) is growing around 40%. So, they are making good headway in the larger sellers and this should ensure that their GPV continues to grow in the 25-30% for the next few years. Remember overall payment market itself is growing at 10% yoy.
  2. Got a much better appreciation of their eco system and how cash app is connected to the seller POS and so on.
  3. Their GPV is only 1% of the total household spend.

Putting together the TAM of the total GPV, growth of the larger sellers, and subscription rev growth I cannot see any sharp slow down in rev growth. The concern seems to be that Square goes after bigger merchants they will not be able to grow GPV as fast due to competition. But the GPV growth in the larger sellers shows that concern to be unfounded. The other concern is that SQ is already too big. But big/small depends on a company’s TAM. I think SQ’s TAM is being under appreciated at the moment. It seems the market is saying SQ cannot grab a large portion of the GPV of the larger sellers. So hanging him at least till the next CC.

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Putting together the TAM of the total GPV, growth of the larger sellers, and subscription rev growth I cannot see any sharp slow down in rev growth. The concern seems to be that Square goes after bigger merchants they will not be able to grow GPV as fast due to competition.

I’m not sure that’s the concern.

The other concern is that SQ is already too big. But big/small depends on a company’s TAM. I think SQ’s TAM is being under appreciated at the moment.

Why do you think that? Square already seems to be having trouble growing its customer base. GPV growth has been slowing – it was only up 27% this quarter.

The subscription segment is the only reason Square commands the PS that it has. So the investing thesis boils down to: Is their ability to increase this segment 100%+ (or even close to that) coming to an end? Because when that happens, overall growth rate will fall precipitously and their PS ratio will no longer be supported.

It’s hard to see these subscription services as more than a neat trick. They’ve grown it at an exceptional pace, but if Square’s customer base isn’t expanding, it will come to an end. The only question is when, and I don’t want to be the one holding the bad.

You should see if they said anything about subscription revenue slowing in recent CCs. Again, this will be what the valuation is based on going forward.

Bear

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Why do you think that? Square already seems to be having trouble growing its customer base. GPV growth has been slowing – it was only up 27% this quarter.

Being larger does not mean it has to slow down. Paypal TPV is 6-7x and it’s growth has been a steady 20-25% over the last 5 years. So, as it grew from 2x to 6-7x of SQ’s current TPV its growth did not slow down. Overall GPV market is growing at 10%/y so SQ is taking market share. I don’t see the GPV trending down much below 25%/y as the bigger merchants are growing much faster (50%) and forming a larger portion of the company’s GPV. Also, SQ has such a small part of the total GPV TAM. There is a lot of competition no doubt. That is why they are focusing on their eco-system, the stickier it is the larger their GPV. Their cost of acquiring a new cash app user is $20. And a majority of sellers self on board.
Subscription if it grows at 70% next year should form a larger portion of the overall rev next year which again means rev growth can continue at 40-50%/y.
At this point I do not see a reason to sell. It is not a business in trouble (NTNX) nor even seeing some uncertainty albeit temporarily (ANET).
The only negative is its poor relative strength which is a technical metric but does carry value as clearly people with lot more info than me are unwilling to believe its growth story. So, there is that.

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Thanks for the response, Texmex. You said I don’t see the GPV trending down much below 25%/y as the bigger merchants are growing much faster (50%) and forming a larger portion of the company’s GPV. I found this in the conference call too:

Over half of our GPV mix now comes from larger sellers and mid-market sellers as we shared is growing 50%, or grew 50% year-over-year in the first quarter.

This is kind of crazy. If half their GPV grew roughly 50%, the other half only grew 4% or so! That would mean they’re moving upmarket massively. I think this is a pretty bullish trend, especially since the high-margin services are more popular with larger companies.

Texmex, you also said: Subscription if it grows at 70% next year…

Where did that number come from? I don’t know if that will happen…or heck it may be even faster. But the 50% growth in GPV from larger merchants makes me think subscription and services may not plummet like I was thinking. (I’m also less concerned about being the one left holding the bag now that I notice their PS ratio is back in the mid-teens.)

Hate to be such a waffler on this one, but I’m dipping a toe back in with Square.

Bear

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This is kind of crazy. If half their GPV grew roughly 50%, the other half only grew 4% or so!

Directionally I agree. But your calcs. are a little off. The way they said in the EC was confusing. Their mid market (>500k) is growing at 50% and their larger sellers (>125k) is at 50%. But their 125k-500k sellers are growing slower around 35-40%. You can chk their 4Q 10k where they have a plot showing the increasing proportion of the larger sellers and you can calculate the growth of different size sellers.

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This is kind of crazy. If half their GPV grew roughly 50%, the other half only grew 4% or so!

Directionally I agree. But your calcs. are a little off.

I have looked at the chart on page 9 of the annual report. I also found on page 61, the GPV for Q4 2018. Seems to me that Bear’s calculation is correct. The chart breaks out GPV for a) less than $125,00;, b) greater than $125,000 but less than $500,000; and greater than $500,000. Being careful, because the data on the chart is for annualized quarterly data, and inputting Q4 total GPV for ’17 and ’18, I get the following:
Q4 ’17 GPV 17,888 million Annualized, $71,552
Q4 ’18 GPV $22,958 million Annualized, $91,832
% GPV >$500k Q4 ’17: 9% Q4 ’18: 24%
% GPV >$125k<$500k Q4 ’17: 24% Q4 ’18: 28%
% GPV $125k or less Q4 ’17: 61% Q4 ’18: 49%
GPV >$500,000 Q4 ’17: $ 6,440B Q4 ’18: $22.440B Increase 242%
GPV >$125k<$500k Q4’17: $17,172B Q4 ‘18: $25,713B Increase 50%
GPV $125k Q4 ’17: $43,647B Q4 ’18: $44,998 Increase 3%
Anyway, that’s my math. Please check. Those GPV values are the 4Q from the 10k time 4 and multiplied by the %’s from the chart on page 9. If you project forward, by Q4 ’19 the % splits are 31%, 32%, 37% for over $500,000 to under $125,000.

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This is kind of crazy. If half their GPV grew roughly 50%, the other half only grew 4% or so!

Directionally I agree. But your calcs. are a little off.

I have looked at the chart on page 9 of the annual report. I also found on page 61, the GPV for Q4 2018. Seems to me that Bear’s calculation is correct. The chart breaks out GPV for a) less than $125,00;, b) greater than $125,000 but less than $500,000; and greater than $500,000. Being careful, because the data on the chart is for annualized quarterly data, and inputting Q4 total GPV for ’17 and ’18, I get the following:

Q4 ’17 GPV 17,888 million Annualized, $71,552
Q4 ’18 GPV $22,958 million Annualized, $91,832

% GPV >$500k Q4’17: 9% Q4 ’18: 24%
% GPV >$125k<$500k Q4’17: 24% Q4 ’18: 28%
% GPV $125k or less Q4’17: 61% Q4 ’18: 49%

GPV >$500,000 Q4’17: $ 6,440B Q4 ’18: $22,440B Increase 242%
GPV >$125k<$500k Q4’17: $17,172B Q4 ‘18: $25,713B Increase 50%
GPV $125k Q4’17: $43,647B Q4 ’18: $44,998B Increase 3%

Anyway, that’s my math. Please check. Those GPV values are the 4Q from the 10k time 4 and multiplied by the %’s from the chart on page 9. If you project forward, by Q4 ’19 the % splits are 31%, 32%, 37% for over $500,000 to under $125,000.

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Sorry, the @9*(@*!!! thing sent itself while I was trying set tabs and before I put in the <>'s.

Oh well, it is more or less readable. Didn’t even put in the:

KC

long SQ

Oforfive… that calculation shows awesome strength…

I remember when Sarah Friar was still around, on one of the calls they said that SQ was finding more and more large sellers getting self on-boarding and it seems that those sellers business is reflecting in GPV growth now.

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% GPV >$500k Q4 ’17: 9% Q4 ’18: 24%
% GPV >$125k<$500k Q4 ’17: 24% Q4 ’18: 28%
% GPV $125k or less Q4 ’17: 61% Q4 ’18: 49%

Your Q4 18 numbers are fine. On their 10K page 9 I am seeing

% GPV >$500k Q4 ’17: 20%
% GPV >$125k<$500k Q4 ’17: 27%
% GPV $125k or less Q4 ’17: 53%

https://s21.q4cdn.com/114365585/files/doc_financials/2018/Q4…

You might have used the Q4 '14 instead of Q4 '17.

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You might have used the Q4 '14 instead of Q4 '17.

I certainly did!!! Counted back “3 quarters” but in reality was 3 YEARS.

So, changes the growth rates. Greater than $500k grew 54%. $125k to $250k grew 33%. Under $125k grew 19%.

Thanks, Texmex. And you were soooo gentle. You left out the “dumb a$$”. :slight_smile:

KC

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