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.


5. Is the company market leader?

Square, Inc. certainly offers a wide array of novel and interesting services, but that is not enough to be considered a market leader. As previously mentioned, the e-transaction market is a very competitive industry where a lot can happen in a short period of time. All these factors considered, it would be too optimistic to assume the firm to be a market leader.


6. Is their market leadership safe?

The first thing to note is that Square is currently not a market leader thus there is no market leadership to protect. As mentioned above, Square does not have an economic moat and they are actively operating in an extremely competitive industry where certainties are not guaranteed. Taking these facets into account two facets, again those being the economic moat and their industry, we can conclude that their hypothetical market leadership is not safe.


7. Is there foreign exchange risk or commodities risk?

Square's business model is definitely influenced by foreign exchange risk, as mentioned in the annual report.


8. How are their profit margins?

The firm has a net margin of 2.24%, which is actually quite low. As stated above, this is also lower than the industry average which is not good.


9. How much capital does the company need?

As is the case with most young and growing companies, Square being no different has gone through several rounds of funding. Their capital expenditure is also quite high, but to the point of being at exaggerated levels. Oftentimes getting past the previously mentioned tipping point costs the most money and the firm does seem to have they seemed to have passed it.


10. Does the company have a loyal customer base?

The services that Square offers have been praised as easy to use and simple. On top of that, when people are partaking in such platforms, they are often not very eager to change as they become extremely familiar and comfortable with said services. Per these factors, it can be said that Square does indeed have quite a strong base of loyal customers.


11. How much cash does the company produce?

Their free cashflows aren’t really high compared to their revenue, which is not a good factor and could indicate little production of cash.


12. What is their value creation over the past ten years?

Square's stock has increased over 94% since their IPO in 2015. Generally speaking, this amount of value creation can be considered quite a positive factor. Better yet, taking into account that they've grown so much in the span of five years, their value creation can be seen as extraordinary.


13. Can the company pay its bills?

Square, Inc. has a quick ratio of 1.87 and a current ratio of 1.88. This means they can pay back their current short-term debt, which is a positive factor when considering investing into the company.


14. How does the company finance itself?

Square's financing was completed via multiple funding rounds from several venture capitalists. The company also seems to use a certain amount of debt to finance their endeavors and it could be argued that they are using slightly too much debt. It should also be noted that the firm uses their own cashflows as well to finance business endeavors.


15. How much debt does the company have?

Long Term Debt: $2.98B, Shareholders' Equity: $2.68B ➤Debt to Equity Ratio: 1.11 ➤ With this metric being valued above one, it means the firm has too much long-term debt.


16. What is their Piotroski F-Score?

4/9 ➤ This value is slightly lower than average, so relatively speaking this is not too good.


17. What is their P/E-Ratio?

550.25 ➤ This metric is too high. Objectively speaking, it seems the market expects tremendous growth from Square in the future which contributes partly to this ratio being so high. Personally, I think that it is understandable for bigger companies to have higher P/E-ratios due to them often being “safer” options, but this is really too much and, in many ways, is indicative of the firm being overvalued.


18. What is their P/B-Ratio?

41.19 ➤ This metric is simply too and can be counted negatively toward the company.


19. What's with their EV/EBITDA ratio?

2,406.01 ➤ This metric is extraordinarily high which is certainly not good and counts negatively against the company.


20. WACC?

15.59% ➤ This is actually quite a high percentage and would result in a lower estimate of the firm's valuation.


Total Score

10/20 ➤ Altogether, this is too low of a score out of twenty. When looking for great investments, we prefer at least a score of 14 to consider a stock interesting. Square's valuation ratios seem to provide the same end result as our own estimate, which is that the stock is overvalued. It must be said that they do have quite an interesting business model which could yield interesting results in the coming years and prove to be highly profitable for early investors, but there is a certain risk attached to this as no guarantees with their business or services can be made.



All the information provided is personal opinion and not directly applicable financial advice. I have no ties to the above company and am not being compensated on their behalf for the writing of this analysis. You should make your own decisions based upon evidence and what you believe is best for you and your financial well-being i.e., conducting your own due diligence.