Square Continues Its Fast Growth Towards Profitability

Square (NYSE: SQ) reported earnings after the market closed on May 2, 2018, and the payment processor continues to show strong growth where it matters:

  • Total net revenue of $669 million, up from $462 million (45% increase year-over-year)
  • Gross payment volume of $17.8 billion, up from $13.6 billion (31% increase YOY)
  • Adjusted revenue of $307 million, up from $204 million (51% increase YOY)

If you’ll recall from a few weeks ago – and from my earnings reports on Visa (NYSE: V), PayPal Holdings (Nasdaq: PYPL), and Mastercard (NYSE: MA) – Square is part of my “War on Cash” basket. Unlike the others, Square is not yet profitable, and as the smallest of the four has some catching up to do, but nevertheless appears to be going in the same direction.

If we measure the performance of each stock from market open on April 25th (the day that Visa and PayPal reported) to market close on May 3rd (the first trading day after Mastercard and Square reported), the short-term results of the shares based on these results is very telling:

Company Opening Price Closing Price Change
Mastercard $173.37 $186.48 7.56%
PayPal $75.39 $73.45 -2.57%
Square $46.80 $49.21 5.15%
Visa $121.14 $127.18 4.99%
Average     3.78%

Aside from the fall of PayPal since earnings – which may have been partially due to an announcement from Amazon regarding its payment service (or simply a valuation correction based on its own results) – an investor in the “War on Cash” basket has had a good week because of these stocks. Short-term results don’t mean anything for long-term buy-and-hold investors, but it is nice to see an investing thesis pay off with immediate results, even as we hope for continued growth going forward.

But we shouldn’t judge a company solely on what they have done in the past. An investment should be considered based on what it looks like the future of the company holds. Square increased its full-year guidance from previous reports, and they are getting tantalizingly close to becoming a profitable company. They are predicting total net revenue between $3.0 and $3.06 billion, and adjusted revenue between $1.4B and $1.43B, a 10% increase from previous growth projections.

Since we don’t have any current earnings, Square doesn’t carry a traditional P/E multiple like other profitable companies. However, we can estimate the future price using a price-to-sales multiple instead. Its current P/S is just over 8 (using the trailing-twelve months of revenue of $2.42 billion, and total shares outstanding of around 396 million). If we don’t expect to see massive share growth, and using the midpoint of Square’s revenue guidance for the full year, we can expect a future share price of about $61 a share, which would be 24% upside from the current price. Should it attain profitability before year end, it may go even higher.

The “War on Cash” is real, and while Square has a bit more to prove than some of the other, more established members of this all-important basket, I am excited to see what this company can do going forward. It remains a long-term holding in this portfolio.

Until next time…

Disclosure: I have purchased shares of all companies mentioned on behalf of my mother and have no intentions of adding or selling shares over the next 30 days. Please read my full disclosure here.


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