Square yesterday announced a massive A$39billion deal with Australian Stock Exchange-listed Afterpay, So we thought we would take a look into the company that is buying Afterpay and see Should I buy Square Stock (NYSE:SQ)

About Square Stock

Square is a cohesive commerce ecosystem that helps sellers start, run and grow their businesses.

The company provides digital payments solutions, The company was founded in 2009 by Jack Dorsey and Jim McKelvey and launched its first platform in 2010. 

Squares tools help sellers make informed business decisions through the use of analytics and reporting. Sellers can manage orders, inventory, locations and employees; engage customers and grow their sales;

Square also offers businesses the opportunity to gain access to business loans.

Square IPO’d back in 2015 at $9 per share, which fell short of their targeted range of between $11 and $13. Square raised $243 million at a valuation of around $2.9 billion.

Should I Buy Square Stock Price

The share price of Square is up 83% in the past year, with a 52-week range of $125.28 – $283.19 the share is currently trading about 10% lower than the 52-week high at $247.

The stock has a market capitalisation of US$112.50billion and is currently profitable with a Price to Earnings ratio of 405.9x.

Square Stock is currently up an outstanding 1,824.20% since their IPO back in 2015.

Should I Buy Square Stock: Dividend History

NYSE:SQ does not currently pay a dividend.

We do not expect the company to be looking to pay a dividend in the near future, and typically of US-listed tech shares may instead focus on growing their ROE internally and giving back to shareholders by increasing the share price and potential buybacks in the future should cash flow allows.

NYSE:SQ is very much in the growth phase of its lifecycle and can potentially offer shareholders a higher return on capital by not paying a dividend and re-investing in the company.

Square Acquires Afterpay

On the 2nd August 2021, Square announced its plans to acquire 100% of the shares in the Australian Stock Exchange-listed Afterpay (ASX:APT) for an all-stock consideration of 0.35:1. Meaning the implied value is approximately $126 for each share in Afterpay. The implied value of the deal is approximately USD$29billion or AUD$39million based on the closing price of Square common stock on July 30, 2021.

Afterpay is less than 2% penetrated within $1T of eCommerce spend in existing geographies. Whilst the growth in the Australian and New Zealand region seem to have started to slow down you can see the massive opportunity remaining in the North American and UK segments. Both of which will greatly complement Squares CashApp target markets.

Should I Buy Square Stock
AfterPay Gross Volume by Region

Afterpay has grown significantly worldwide with revenues and volumes up about 4x in only 2 years. Afterpay will bring an audience of 16.2million active customers and nearly 100k active merchants using the platform.

Afterpay Active Consumers and Merchants

Should I Buy Square Stock: Investor Sentiment

After surveying 217 Investors about their current NYSE:SQ shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here, are the results;

Should I Buy Twitter Stock
Prophet Community Investor Sentiment

The above shows that community members of the private Prophet group are bullish on Square Stock for the medium to long term.

SQ Stock Insider Ownership And Trading

Ownership in Square stock is governed predominantly by Institutions at 63%, with the general public and individual insiders being the next largest holders at 22% and 14.4% respectively.

CEO Square and Founder of Twitter Jack Dorsey seems to be a lot more bullish on his Square holdings as compared to Twitter. Jack Dorsey holds approx 10.4% of Square stock or $12.1billion, this is compared to his $1.3billion holding in NYSE:TWTR.

There has been a single insider transaction recently in Square Stock. However, we would not consider this of significant importance.

DateValueNameEntitySharesMax Price
02 Mar 21SellUS$2,069,723Kleiner Perkins Caufield & ByersCompany8,207US$252.19
Recent Insider Transactions Square Stock

Should I Buy Square Stock: Fundamentals

Square trades on a market capitalisation of US$112.59billion and is currently a profitable company trading on a price to earnings ratio of 325x.

Market CapUS$112.59billion
Shares Issued392million
PE325x
EPS0.81
Dividend YieldN/A (does not pay a dividend)
Average Volume8,629,396
Debt / Equity162%
Revenue$13.17billion
ROE15.98%
Debt$3.749billion
Equity$2.31billion
Square Stock Fundamentals

The company has a debt to equity ratio of 162% with over $3.74billion debt. This Debt to equity ratio is considered high in our opinion, this is in line with the companies high PE ratio. However, in our opinion, this is due to the company chasing growth.

From the company Q2 2021 shareholder report, Square has increased Gross Profit by 91% YoY and Adjusted EBITDA significantly. Square’s Cash App contributes to just shy of 50% of the group’s revenue. Cash App is the company’s peer-to-peer (P2P) payment service. CashApp also allows users to buy, sell and transact in Bitcoin.

With the Afterpay Acquisition being embedded into the CashApp, we expect to see this to significantly increase revenue and Gross Profit Margins, however at the expense of slightly lower EBITDA margins.

Second Quarter Financial Metrics – Square

Should I Buy Square Stock: Financials

Should I Buy Square Stock – Income Statement

In the second quarter of 2021, Seller generated $1.12 billion of transaction-based revenue, up 78% year over year, and 21% on a two-year CAGR basis.

Square Income Statement Q2 2021 Update

Should I Buy Square Stock – Balance Sheet

From the Square Q2 2021 update, Square ended the second quarter of 2021 with $7.1 billion in available liquidity, with $6.6 billion in cash, cash equivalents, restricted cash, and investments in marketable debt securities, as well as $500 million available to be withdrawn from their revolving credit facility.

Square on May 20, 2021, completed an offering of $2.0 billion in senior notes. This offering strengthens
their balance sheet and supports the growth of Square’s business and continued investment to drive long-term growth.

Square Balance Sheet – Q2 2021 Update

Square Competitive Analysis

Square has a number of competitors in the fintech space, legacy and fintech alike. However, we believe Square should most appropriately be assessed in comparison to other fintech players such as PayPal and Stripe. We would consider legacy banking products, whilst competing with Square not relevant in the valuation of such.

Competitive Analysis Square Vs PayPal

You can see from the above that Square trades on a PE ratio of 325x compared to PayPal’s 62x, these are both significantly high PE ratio’s in our opinion. The price to sales ratio for Square is 9.08x which is a slightly better value than PayPal’s 13.73x. However, this may be because the market is expecting a higher future sales growth from PayPal.

PayPal Holdings revenue for the twelve months ending June 30, 2021, was $23.846B, a 24.08% increase year-over-year. Square revenue for the twelve months ending March 31, 2021, was $13.174B, a 156.54% increase year-over-year.

Based on the revenue numbers, Square may have additional upside here, especially if it can start to increase its EBITDA margins.

Prophet believes that the market has priced massive multiples into tech stock prices at the moment. This is similar to the Twitter Share price on IPO. We can see a similar outcome playing out in massively overvalued tech stocks such as Tesla in the years to come if it does not live up to growth numbers.

TWTR Share Price From 2014 to 2021

Twitter shares are now only trading 1.09% higher than their IPO high’s in mid-2014 of US$69 per share. This goes to show that investors that are willing to pay massive multiples for potentially higher growth in the future may be left short. Especially when the company doesn’t deliver on the growth or hype.

Prophet’s Take On Square Stock

We See Square as fitting in the fintech revolution category. This is our opinion is a sector that will continue to thrive into the future if traditional banking struggles to innovate and provide quality solutions for its customers.

The acquisition of Afterpay by Square will expand the companies product offering with a solution that is extremely popular amongst millennials and Gen Z banking customers. However, competition in the BuyNowPayLater sector may be heating up again with rumours Apple and PayPal are looking to enter the game.

Square will need to continue to innovate and grow its customer base in order to justify its significant PE and price to sales ratios however if the company can live up to the growth expectations we could see this going higher.

CEO Jack Dorsey has significant skin in the game at USD$14billion worth.

Square is growing revenues and EBITDA at impressive speeds, with Gross Profit up 91% YoY. The company will need to watch the excessive use of debt to fund operations at the debt to equity ratio is significantly high.

If the company continues its monster growth, however, the current PE and P/S ratio will come down to more appealing levels. However, it is once again a question of how much are you willing to pay for future growth and cash flows.

We do not own SQ directly however, hold a portion of the company through our participation in the ARK Fintech innovation ETF.

Learn How We Analyze A Company:

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