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Square, Inc. Analysis



Company: Square, Inc.

Ticker: SQ Previous Close: $212.78 (3/30) Industry: Software-Infrastructure


Short-term: Hold

Middle-term: Hold

Long-term: Hold


Fundamental Analysis


Economic Moat:


Free Cashflow


Free Cashflow: $243,201,000 ➤ Square's free cashflows in the past five years have shown a strange growth pattern. There appears to have been a peak in free cashflow during 2019, but now this factor has returned to a level comparable with more recent years.

Revenue ( = Sales): $9,497,578,000

Free Cashflow / Revenue (>5%) = 2.56% ➤ This metric is a bit on the low side, but it is not terrible. The growth in recent years has shown to be cyclical, but overall there has still been net growth.


Net Margins (> 15%)


Net Income (Consolidated): $213,105,000 ➤ Similar to the free cashflows, there has been a bit of fluctuation with the net income in recent years. In analyzing this metric further, Square's net income started out as negative, which is not good, then afterward there was a noticeably steep increase. As well as this, just like the free cashflows, a peak with this metric was seen in 2019. At this point and time, the net income has lowered again and became more comparable to the recent years.

Revenue : $9,497,578,000

Net Margin = Net Income / Revenue = 2.24% ➤ This value is too low compared to the usual benchmark and even compared to the industry average which sits between 3.5% and 6.2%. Due to this lower value, we would mark this as a negative for the firm since this is not something we like to observe.


ROE (> 15%)


Return on Equity (ROE)= Net Income/ Shareholder's Equity

ROE = 9.07% ➤ This metric is also quite low compared to our usual benchmark and it is also slightly lower than the industry average which sits between 10% and 13%. Altogether, this is also a negative mark against the company as the value is not very good.


ROA (> 6%)


Return on Assets (ROA)= Net Income / Assets

ROA = 2.16% ➤ This metric is quite low and also lower than the industry average that sits between 5% and 6.8%. Just like the above ROE, this metric is factored negatively against the firm.


Economic Moat Conclusion

From a broad perspective and in considering most of the fundamental metrics of the firm, Square's financials aren’t very good; however, investors should not be overly worried as these financials are not that bad. Moreover, the current level of their financials seems in line with the past which speaks to future sustainability. Away from this, Square's main areas of weakness are their free cashflows which are quite low and their net income, return on equity and return on assets being low compared to industry averages. From this it can be concluded that this company does not have an economic moat and as a result of this, they are not very well protected against setbacks and competition.


Valuation


To better understand the valuation of Square, Inc. we will use their free cashflow figure of $243,201,000. The trend in the most recent years has been very cyclical making the estimation of the firm's growth rate a bit more challenging. Using the average growth of recent years as a guideline can assume a future yearly growth rate of 35% in the first five years and 15% after that with Square. Considering their absence of an economic moat, we go on to assume a discount rate of 10%. Analyzing these metrics together, we get an estimated value of $43.24


Current Price: $212.78 (3/30) Estimated Value: $43.24 ➤ Square, Inc. unfortunately has no safety margin and for this reason they can be seen as overvalued. Their average growth rate is quite strong which is a positive for the firm, but it is their weaker free cashflows that hold the most weight per our analysis.


20 Point In-Depth Analysis


1. CEO

Jack Dorsey is the founder and CEO of Square. With him being the founder and all of the successful business ventures that he is involved in to note, this is certainly a plus as these characteristics are usually indicative of the company's leader being more dedicated and more involved with the business. Speaking further to this, Dorsey is also known for being co-founder and CEO of Twitter which bolsters his track record and overall business acumen since Twitter is one of the largest and successful social media platforms out. It should be considered that, like most everyone he has his flaws and similar to other public figures he has had his fair share of good and bad moments throughout the past. Lastly, despite the many controversies that Dorsey has been a part of in the past, he has grown in his role and in his life of which Dorsey is now an active philanthropist.


2. Is the company innovative?

Innovation does seem to be an integral part of Square's business. Their main focus has been geared toward combining mobile payments and merchant services into a new, easy-to-use platform. It should be noted that mobile payments are nothing new and that the mobile payment space is a competitive market, but Square also implements inventory and sales tracking along with financing options to separate themselves from the competition.


3. Can the company grow?

Growth possibilities are definitely present. Looking solely at the firm's financials, we can see that over the past five years the growth has been quite strong. Potential investors should also view Square in a positive light as they are also in a growing industry which could, as long as they stay ahead of competition, certainly stimulate exponential growth for years to come.


4. How does the company grow?

Square's growth is mainly driven by launches of new technologies and services which are present in quite a young industry. The main challenge that the firm faced and continues to face is reaching a specific tipping point of users that would activate network effects. At this point and time, it appears as though Square has exceeded a preliminary tipping point since their app has been downloaded over 33.5 million times. In sum, this broad usage of their product and services is highly indicative of future growth but it does mean that the firm's long-term survival and growth is guaranteed as Square will still have to fend off any of the strong competitors who have also passed this tipping point.