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Analyst Read: $SQ

Still overpriced?
(Sundry Photography)
(Sundry Photography)
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The narrative today on Square ($SQ) is that it’s down almost 9% because of its additional $170 million purchase of bitcoin. Sure, the increasing commitment to Bitcoin, which is seeing a 15% pullback, might be contributing to negative sentiment in part.

But in my mind, the stock is down because of how their core, non-Bitcoin business did in Q4. 

  • Square has been including bitcoin “sales” as revenue, but only has 2.3% Gross Margins.
  • When you adjust their “bitcoin brokerage business” out, the company is still growing pretty strongly, with 23.4% Revenue growth and 45.8% Gross Profit growth (year-over-year).
  • The market didn’t like that Gross Profit was flat at $800 million overall and Cash App Gross Profit was actually down slightly at $377 million for Q4 as compared to Q3, signaling a potential lull or tapering off of pandemic-driven growth.

I really do love Square and believe it’s a great business to buy if the price comes down during a sell off. It’s an amazingly popular, sticky, and high ROIC business (they make >6x ROI per every user they acquire!).

At $240 per share, though, we’re looking at $SQ trading at 26x forward Gross Profit, assuming they grow an additional 30% this year. I would be more comfortable buying closer to 20x Gross Profit, which might happen during an aggressive growth stock sell-off or if the stock trades sideways while fundamentals keep growing.

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