Square Inc. (Ticker: SQ) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Square, Inc. (NASDAQ Ticker: SQ) is an American financial services and digital payments company that acts as a commerce ecosystem. SQ allows small businesses to start, run, and grow their businesses by turning mobile devices and computing devices into payments and point-of-sale solutions. Sellers can immediately start accepting payments in person via magnetic stripe, Europay, MasterCard, Visa, or Near Field Communications such as a tap. Square was founded in 2009 by Jack Dorsey and Jim McKelvey and launched its first product in 2010. Square also owns the popular person-to-person money transfer app Cash App. In October 2020, Square put 1% of their total assets at an estimated $50 million in Bitcoin, which is now worth over $220 million. Square co-founder Jack Dorsey is a well-known advocate of Bitcoin and its potential as the shared monetary system of the internet. Square cited Bitcoin's “potential to be a more ubiquitous currency in the future” as their reasoning for the decision. In 2021, Square reached an agreement to acquire majority ownership in Tidal, a subscription-based music, video, and podcast streaming platform. Currently, Square is considering making a Bitcoin hardware wallet and plans to invest $5 million in Blockstream’s solar-powered bitcoin mining facility.
Quantitative Analysis
At the time of this writing (6/20/2021), Square is trading at $237.05 with a 52 week range of $97.92 - $283.19 and a market cap of $102.91B. In Q1 of 2021, Square’s gross profit was $964 million, representing a 79% year-over-year increase with a net income of $39 million. The Q1 earnings before interest, taxes, depreciation, and amortization (EBITDA) gain was $236 million. The return of equity (ROE: Net Income / Total Equity *100) of Square is 15.94%, the price to earnings (P/E) ratio is 331.54 and the Net Margin (Net Income / Revenue) is 2.72%. The current earnings per share (EPS) is $0.71 for SQ. This financial analysis was done using financialstockdata.com (become a beta tester here). Square’s stock went from ~$39.50 in March of 2020 to $276.02 in February of 2021. Square’s stock price has roared over the last year, shooting up ~700% in only 12-months! You can view Square’s 2021 Q1 earnings here and Squares’s 2020 10-K here.
Qualitative Analysis
Square’s stock has traded similarly to the price of Bitcoin due to the investments mentioned previously and the introduction into Cash App’s crypto trading features (you can now purchase cryptocurrencies directly in CashApp). Although Bitcoin was booming at the time of quarter earnings, all revenue and gross payment volume significantly beat many analysts' estimates of Square. Many questioned how Square would fare the COVID-19 pandemic, as they rely heavily on small businesses using their products for payment services. With many small businesses shuttered, many wondered whether Square would survive. Square did more than survive - their stock value skyrocketed, in large part due to growth in CashApp. Post-pandemic, as small businesses reopen, Square’s original services should return. This, in combination with their recent acquisition of Tidal music, should provide investors confidence in their ability to adapt quickly to changing market landscapes. Square is not alone in the digital payment space, with heavy competition coming from PayPal Holdings, First Data’s Clover, and Shopify. Square has also doubled down on their investment in Bitcoin, purchasing an additional $170 million in early 2021 on top of the $50 million purchased in October of 2020. Square is one of the leaders in the financial tech space and looks more than capable of continuing to provide innovative solutions in the digital commerce arena.
Bullish Thesis
Here are three points to support the bullish thesis:
High Revenue: Many emerging tech companies covered in previous breakdowns consistently post YoY losses. For most of these companies, short-term losses are accepted by investors confident that the companies are dumping money into R&D and growth. Square has managed to capture the best of both worlds: continued growth and increased revenue and positive free cash flow. Square receives a cut of every transaction processed using their products. By providing both hardware and software payment solutions, Square sets itself apart from many of its competitors, who offer only one or the other. As digital payment technology improves, it seems reasonable to assume that many companies will adopt services capable of handling both in-person (i.e., hardware) and remote (e.g., online, software-based) payments. If Square can continue to provide innovative and easy-to-use payment services, expect their user base and revenue to grow.
Bitcoin: At Green Candle, we don’t hide that we’re strong believers in BTC, and Square’s financial commitment to it is, in our opinion, a reason to be bullish on both BTC and the company itself. Briefly, BTC is a cryptocurrency powered by a decentralized, public, blockchain ledger. BTC has several built-in (hard coded) features that we believe make it a superior monetary system (to learn more about our position on BTC, see our Friday newsletters here). In October of 2020, Square announced that they allocated $50M as an investment in Bitcoin. In early 2021, they allocated an additional $170M to Bitcoin. Speaking at the 2021 Bitcoin conference in Miami, Jack Dorsey, Square’s co-founder and CEO, stated that “I don't think there is anything more important in my lifetime to work on.” He also recently teased that Square may be working on a hardware wallet to HODL BTC. It is apparent that Square plans to invest considerable time and energy into developing crypto-related features across their platforms. This is already true of CashApp, where users can purchase, hold, and transact cryptocurrencies.
Product Diversification: Square produces and provides hardware, software, and general financial services that empower economic freedom. On top of these products, Square now seems poised to make major headway in the crypto space, recently teasing a Bitcoin hard wallet. They also recently acquired a majority position in Tidal, a music, video, and podcast streaming service. As noted above, Square has proven its adaptability to changes in the market - as small businesses were shuttered during the COVID pandemic, they shifted their focus toward growing CashApp. Now, as small businesses reopen and their Seller platform comes back online, Square is looking to extend economic empowerment to a new sector: musicians. Given their incredible track record, don’t be surprised if Square transforms Tidal into a serious threat to other popular streaming services such as Spotify. Investors can sleep easy knowing that Square is adaptable to market changes.
Bearish Thesis
Here are three points to support the bearish thesis:
Polarization of Jack Dorsey: Although Square would not be where it is today without co-founder Jack Dorsey, the reputation and polarization of Dorsey may cause issues in the future. Jack Dorsey is also the founder of Twitter, a popular social media website which has been in headlines recently for censoring and removing polarizing figures from its platform. Twitter even censored former President Trump and has permanently removed him from the Twitter platform. No matter your political views it is concerning that a platform can remove such a prominent figure and censor based on its views. This has caused many to not like Dorsey as a founder and have many worried about the censorship and other drastic measures he may take with Square. Square, like Green Candle, fully believes in Bitcoin, yet Square has taken a big position and has made a large bet on Bitcoin being the currency of the future. If this pays off it will be incredible for Square, but it is a large risk.
Small Business Struggles: Due to the COVID-19 pandemic, many small businesses were forced to close their doors for extended periods of time. According to NerdWallet, an estimated 600,000 small businesses closed their doors last year which is about 200,000 more than the yearly average. Square’s business interface platform may take a hit with the negative effects of COVID affecting small businesses around the United States. Although more businesses closed than usual, 4.3 million business applications were filed in 2020 which is up 24% from 2019 and 51% higher than the average from 2010 - 2019. It’ll be interesting to see how this affects Square’s business interface section of their business. Will the opening of businesses improve Square’s business interface portion of their business or will more businesses close as PPP loans run out? Will the massive number of small businesses succeed or will more than 20% of the businesses started in 2020 fail within the first year not giving SQ the opportunity to obtain more business?
Competition: It seems in all aspects of Square’s business there is major competition where Square is not the top option. PayPal Holdings has Venmo and there is now Apple Pay where the 56% percent of Americans who own an iPhone can transfer money directly from their phone instead of going through a 3rd party app. PayPal also has a payment system for small businesses but few have the integration with iPad’s like Square does. Also for buying and purchasing stocks and cryptocurrencies like Bitcoin there are other avenues such as CoinBase, BlockFi, and other stock brokerages like Charles Schwab, Robinhood, etc. that will make it difficult for Square to get a large portion of that market. Now that investing and cryptos are more mainstream, Square may be able to obtain a large profit from only a small subset of the market but the challenge will be to keep those customers.
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Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.