As long as I’m documenting my sales (examples: http://discussion.fool.com/why-i-sold-out-of-ssni-32479890.aspx and http://discussion.fool.com/why-i-sold-out-of-mitk-32483551.aspx), I thought I might as well start posting my thinking regarding purchases. This is even more important since, as Saul says in the KB, it doesn’t really matter what shares do after you sell them. It’s the ones you own that count.
And I now own shares of Square. I understand skepticism of any Jack Dorsey company, and I also acknowledge that the numbers don’t immediately jump off the page…though, when you dig further I believe they do.
One thing that intrigued me was a PS ratio under 3, which seemed a little too good to be true. But that was quickly cleared up by a recent article from Bert:
total net revenue…includes the fees that the company collects from merchants on behalf of the credit card companies; adjusted revenues are the revenues the company earns for its role as a payment processor. (http://seekingalpha.com/article/4018675-square-making-paymen…)
Using this “adjusted” revenue, PS was about 6.7, which makes a lot more sense. This grew 51% YoY in the Sep 2016 quarter. Their growth is steady sequentially as well, and Bert even calls it, “what is basically a recurring revenue stream.” It certainly isn’t “recurring” in the same way as subscription revenue would be, but that is always a good word to see. Certainly seems like they do well when their customers do, and I can imagine as long as they perform as advertised customer retention, and of course addition, will stay strong.
Another great boon is what seems to be an inflection point they’ve reached on profitability. Bert speaks to that, but this Fool article lays it out explicity:
With two factors working in Square’s favor – an expected decline in loss-leading sales as a percentage of revenue and the growth of higher-margin sales – investors can expect strong margin improvement for the foreseeable future. (http://www.fool.com/investing/2016/11/15/why-squares-operati…)
Here’s another helpful resource, the Q3 shareholder letter: https://www.sec.gov/Archives/edgar/data/1512673/000119312516…
Since the shares were set back earlier this year, the company’s revenues have grown and its margins are improved, making for a much more valuable SQ today. With shares not yet catching up, I decided it was time to take a long position.
Bear