What Mark Palmer actually said.
I have a copy of the sell recommendation and analysis from Mark Palmer that sent Square down 15% or so today. I’m not allowed to post it all of course, so I’ll give you a little summary of his points (some of which I felt were laughable). For instance:
He makes the assumption that investors have identified Square as a company that would be especially benefitted by tax reform, because tax reform would be beneficial for small businesses, and SO, if tax reform fails to be enacted, it might sell off. (Boy, that was a convoluted argument. I’ve never heard anyone say Square would be helped more than other companies by tax reform. I think he set that up as a straw man, so he could then imagine it would be hurt if tax reform didn’t go through. Never mentioned what would happen if it did go through, though).
Another convoluted argument. He says that this is an especially good time for small businesses that Square deals with, and when a recession was threatened in the past, Square didn’t do so well. (Well neither did anyone else, and a recession is one thing that almost noone sees as a realist immediate danger).
Another convoluted argument. He says part of Square’s rise is tied to “the current Bitcoin mania,” and then he worries what will happen if the bitcoin mania suddenly ends. (Square is doing a tiny experiment with Bitcoin, and none of its revenue and earnings rises have been tied to it at all. Another strawman! You may doubt that anyone would say something so silly, but here are his exact words: “Another factor that could weigh on SQ’s multiple is any pause in the current Bitcoin mania.” I think Bitcoin is a mania too, but I don’t see any sign that it will suddenly go away so you should sell your Square [Maybe your Nvidia]).
Next he attacks Square’s move into Square Capital (which everyone else loves), feeling that Square is taking on increased credit risk. And that Square seeking an Industrial Loan Charter “heralded an increased credit risk”.
Square also set aside $3 million against possible loan losses this quarter as its loan portfolio has continued to grow. Mark Parker said “We were concerned about the $3.4mm charge related to loan losses that SQ took… versus no such charges in the prior year period” and “While SQ only retains a small portion of the loans it originates and therefore has limited exposure to direct loan losses, such losses nevertheless have an impact on Square Capital’s operating model.” Etc.
Next, his low valuation is based on his Estimates for Sales and Adjusted EBITDA. He includes a table. Let’s see, he uses gross sales instead of the lower adjusted revenue, BUT he estimates JUST A 2% SEQUENTIAL increase in SALES in the Dec quarter (Black Friday, Xmas, etc) over the Sept quarter!? Who is he kidding?
And even worse, for adjusted EBITDA, which last year went $13 million, $12 million, $30 million (!) in the final three quarters of the year — this year he’s estimating $36, $34, $36 million (!) in the same three quarters. So last year the December EBITDA was up 150% sequentially, so this year he estimates it will be up 6%!!!
He will evidently do, or say, or estimate, anything at all to make his short thesis sound good. So if you are worried about a big Square position you are holding, don’t worry on the basis of this. This is just a short attack, worthy of Citron, with no meat at all. Parker just saw a stock rising rapidly and must have said “Let’s take a short position and I’ll figure out some way to write an attack article".
Hope this helps,