Square: Cracks Forming

Nov. 09, 2018 3:42 PM ETBlock, Inc. (SQ)151 Comments


  • Square actually traded down following a big Q3 beat.
  • A lot of the negative signal from prior to the quarter contributed to the weakness in the stock.
  • The market has missed that share counts are exploding, up 15% YoY.
  • The stock still trades at about 23.5x '18 adjusted revenue estimates.

As some shareholders hate, my previous articles on Square (NYSE:SQ) pointed out the substantial risks in owning the mobile payment provider with limited profits at stretched valuation multiples. Following the release of Q3 results, some more cracks are starting to form in the runaway growth story where my investment thesis already identified negative signals.

Square TerminalImage Source: Square website


Though mostly ignored now, the GPV (gross payment volume) growth slipped below 30% for the first time. The majority of Square revenues are still based on the transaction fees and growth continues to decelerate as Square shifts toward subscription and services revenues.

Source: Square Q3'18 shareholder letter

Another issue is that the Weebly and Zesty acquisitions closed in Q2 provided an incorrect view of substantially accelerating revenues. In reality, these deals added $25 million in additional revenues that contributed a large amount of the accelerated growth and beat in the quarter. Without these deals, revenue growth was 56%, not the headline number of 68%.

The midpoint growth rate for Q4 dips down to 59%. Square typically beats their very conservative guidance, but adjusted revenues at nearly $450 million will require another substantial beat to match the Q3 growth rate.

Remember that the CFO leaving was a negative signal that some growth rates weren't sustainable at these levels. In addition, the company is almost spastically moving into new areas like installment loans, corporate catering and website building. All areas moving away from their core payment processing business and related fintech business opportunities.

These moves all add to revenue growth in the next year, but all revenues aren't equal. Square is going to have a difficult time managing a full suite of business tools with best of breed products as the company becomes extremely diversified. At some point, the company might need to let some other company

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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