Potential Multibaggers: Square, The Bank Of The Future

About: Square, Inc. (SQ), Includes: TWTR
by: From Growth to Value

Square is the ninth Potential Multibagger I pick.

Square released its earnings after the market on Wednesday, February 27.

The Cash App is the beginning of a very promising shift for Square.

Long term, I think Square is one of the best stocks to invest in. I keep adding shares and see it as a core holding.

In this article, I explain why I think Square has an enormous potential over the long term.


In my article about why you should have growth stocks in your portfolio, I wrote about how my growth stock strategy works. The principles are more qualitative than quantitative and I think that is appropriate for growth stocks. The results of the Potential Multibaggers have been excellent, beating the market by more than 20%. So, the theory works.

A lot of them are highly scalable and quantitative ratios do not tend to find the winners. Amazon (AMZN) has never been a buy if you looked at quantitative ratios, and neither were Netflix (NFLX), Tesla (TSLA) or almost all other growth stocks. For people who are not convinced: Yahoo! would have won over Alphabet/Google (GOOG) (GOOGL) any time if you would have looked at measurable ratios. But we all know how that turned out.

The basic philosophy of the Potential Multibaggers portfolio is that stocks can only go down by 100%, but they can go up by 1000s of percentages. A few big winners are more than enough to compensate for quite a few losers and still make you beat the index. Of course, because these are growth stocks and not megacaps, the stocks in the portfolio of Potential Multibaggers will be quite volatile by nature. You should have the stomach to sit out the big swings and concentrate on the only period that matters for investing: the very long term.

In the articles in this series, I pick stocks that I believe to have the potential to become multibaggers over the course of years. These are no short-term plays, but stocks to hold in your portfolio for decades. All of them have the potential to be ten-baggers or more. And exactly that element had kept me from writing about the pick that I am going to present you in this article.

The ninth Potential Multibaggers pick: Square

The ninth pick in this series is Square (SQ). Square logo stock multibagger


Square has been a red hot stock for a while now. I have it in my portfolio since February 2017 and it has been a good performer: I am up 333% on my initial buying price, but way less from my average price since I have been averaging up to around $58. This is the price evolution over the last five years:

Chart Data by YCharts

Although I started this series in May of 2017 and have picked eight stocks so far, for one reason or the other I thought Square was not a Potential Multibagger. I thought it was already too big. But although Square's market cap is more than $30B now, I have been convinced by the last earnings call that Square still can be a Potential Multibagger, which means that I see the potential for Square to grow to $300B over time. That is a lot more difficult than growing from $2B to $20B but I really am convinced that Cash App is a game-changer for Square and that it can propel the company to the giant cap category over time.

The stock price after earnings

After the earnings were released on February, 27, Square fell by 6.66% after-market, as if Satan himself had a hand in it. This is what the stock price has done since the earnings:

Chart Data by YCharts

Not a huge drop, but down anyway. I have made use of the opportunity to buy a few shares again, averaging up to $58. I consider Square as a core holding and from now on a Potential Multibagger as well. This is by far the biggest Potential Multibagger, which could make it somewhat less volatile than picks like Shopify (SHOP), Baozun (BZUN), Weibo (WB) or Momo (MOMO).

The fact that the stock initially went down and now again was not because of the earnings release, the results were good, but because of the guidance for next year, which was seen as weak. In this article, we analyze the earnings, look at the guidance and evaluate the long-term perspectives of Square. Then we will look at the traits of a Potential Multibagger and apply them to Square.

The earnings

To be clear from the start: I was impressed by the earnings of Square. The Q4 Non-GAAP EPS came in at $0.14, beating estimates by $0.01; The GAAP EPS of -$0.07 beat by $0.01 too. I have been saying for a while that I don't care that much for what I call the expectations game. Because it is really a game: hitting, beating or missing. There is enough financial trickery to bend the numbers in your advantage, even with GAAP. How about share buybacks, for example?

But that doesn't mean earnings results are not important. But I look behind the headlines of both the expectations game and the guidance game. Because the guidance game that is also included in earnings: being conservative and guiding low is often seen as weakness, which I think is ridiculous. I like an under-promising, over-delivering management.

What I do focus on depends on the kind of company that releases earnings. Square is still growing at an insane rate and for growing companies, the most important part is growing revenue, because that mostly tells you if the company is taking market share. And the revenue growth for Square was impressive: it went up by 64.2% YoY to $464.25M. That is huge growth and that is what is important for Square. And before you shout: 'Acquisitions! Weebly, Zesty!': excluding acquisitions, the revenue growth was still a jaw-dropping 53%.

But what did investors react to after the earnings release? To earnings, profitability. The guidance there was weaker than expected: $0.06 to $0.08, while analysts were expecting $0.12. One analyst, Mark Palmer of BTIG, gave another sell advice, citing higher spending and weaker earnings guidance. Yawn. If you want profitability, don't buy growth stocks, buy a dividend aristocrat or so. By the way, that analyst has brought out advice to sell from $38.

The proof of the shortsightedness of analysts? Square sees the FY2019 earnings coming in at $0.74 to $0.78 cents, exceeding the consensus of $0.70. But still, only the focus on Q1 2019 guidance. Sigh...

What I find important for a growth company is revenue growth guidance and that was fine: the Q1 2019 revenue was guided between $472M and $482M (consensus of $474.0M), up from $307M in Q1 2018, growing at 55% midpoint. Those are huge growth projections. I expect these numbers to come down a bit over time, due to the law of big numbers. I have had remarks about that law from readers, who may be mathematicians, scientists or programmers, and yeah, I know that there is a law of big number in probability and statistics too, but in finance, the law of big numbers means:

In a financial context, the law of large numbers indicates that a large entity that is growing rapidly cannot maintain that growth pace forever.

(Source: Investopedia)

So the growth will have to come down a bit eventually. That will probably be another reason for analysts to bring down Square. But, hey, I don't care. I love it when they bring down the stock price of excellent companies.

Square's important paradigm shift

Until now, Square has been mainly focusing on products for businesses and that still is where Square makes most of its money. But businesses are not the end game for Square.

Where Square is outshining its competitors is that its products are all very tightly interconnected into a flexible ecosystem. Clients can use Square's products all together and it makes sense to combine them: accepting payment cards, using Square installments to split big sums into smaller installments with Square Installments, Square Capital for lending services, the Cash Card, the Square Payroll to pay your employees etc.

As Jack Dorsey, Square's famous CEO, said on the Q4 2018 earnings call, this ecosystem also attracts developers:

And this ecosystem mindset is not just around our services, but it’s also around our developer platform as well. So as a developer coming to our platform, you get your access online, you get your access in-app and you get your access hardware, all in one place. And as we continue to improve that experience, we just provide a much more powerful option, not only for developers and their small business customers, but their larger merchant customers as well.

So the fact that the ecosystem is so strong attracts more developers... which will make the ecosystem even stronger. It is a virtuous circle that bodes very well for Square's future.

I think little people will dispute the fact that Square is very successful. But despite this huge success, the company only has a few million SMBs as its customers. I write a few million because the most recent number I could find was 2 million at the end of 2017. Maybe a reader has more recent information?

Investing in growth stocks is often projecting and imagining. Now try to imagine that Square could create a similar interconnected ecosystem of products for consumers as they have done that for merchants. Well, Square has actually started doing that and therefore I think the company is still in the early stage of its development.

What do I mean by 'Square has actually started doing that'? Square has developed Cash App, which is basically a mobile app that allows you to transfer money, mostly smaller amounts, to each other via the app or via e-mail. Cash App is, as far as I know, the only app that you can use to pay with bitcoin as well.

Cash App Square Jack Dorsey payments Square stock

(logo Cash App, source)

From the app, you can use a Cash Card, basically a Visa card, to withdraw the money from an ATM or you can transfer it to your bank account. The Cash Card is a black card that looks pretty cool. By the way, there is a trend of creatively customizing the cards.

Cash Card Square stock shift Multibagger (Cash Card, source)

In August 2018, Square's Cash App surpassed the number of downloads of PayPal's (PYPL) Venmo, which was seen before as the big winner in the space. And for 2018, the number of downloads were impressive. Cash App was in the top 20 of free downloadable apps of 2018:

(From the Q4 2018 earnings call slides)

But downloading an app is not using it yet, of course. Last year the Cash App had 7 million users. Now, on the last earnings release, it was announced that the app had more than 15 million users. And users means MAUs in this case, or Monthly Active Users. Those are ordinary people, not just SMBs (Small and Midsize Businesses).

So the Cash App is a great way to go to consumers directly. Square wants to get into the consumer financial services, not just the merchants', where they make the bulk of their money right now.

Former CFO Sarah Friar said to CNBC:

Anything you do today with a bank account, you should look to Cash App to begin to emulate more and more of that.

Sarah Friar, CFO Square, stocks, stock multibagger

(Former Square CFO Sarah Friar, source)

This is a major paradigm shift for Square. The consumer market is so much bigger than only SMBs. And, mind you, Square wants both SMBs and consumers and larger customers. CEO Jack Dorsey on the earnings call:

We’re pretty excited about what we’re seeing with larger sellers. A big factor in this is our developer platform, making sure that larger businesses have access to our full speed of tools in the ecosystem and can custom fit it to their needs.

So if they just want to use a hardware, they can just use a hardware and then can integrate it to their own systems, whether it would be newer systems or legacy systems. We’re also pretty excited about the size of merchants that are utilizing our various services. So a Square Terminal seller, for instance, is annualized GPV is around 190k, registered seller is about 300k. Restaurant sellers, 650,000, so we’re reaching some larger folks.

So that may be the focus for the next few years. But for the longer term, I see Square transitioning to the consumers' market too. That means there is huge potential: savings accounts, personal lending, a platform to make your investments etc. Square could be the alternative to banks that a lot of people have been hoping for since banks have lost their solid reputation in the financial crisis of 2008-2009. And you can see that in the very low numbers of satisfied customers of banks:

With the Cash App user base growing so fast, this opens huge opportunities for the long term. The new CFO Amrita Ahuja on the earnings call:

So we’re very pleased with the progress that we’ve seen with Cash App. We are driving meaningful revenue contribution, along with network growth and network engagement, and that is driven by the strength of the business model we see there, and just to underscore some of those points, where we see a massive opportunity ahead of us to enable access to financial services. There are over 25% of U.S. households are unbanked or underbanked, and clearly, as a top 20 app in 2018, Cash App is now achieving mainstream scale.

(bold and italic: FGTV)

The Cash App probably still loses money now. There is some monetization, but Square spends a lot on promoting the app. And I think this is a good idea. Growth is all that matters right now. Getting consumers on board of the Square platform is much more important than profitability right now. Later on, these consumers can be targeted to cross-sell other products.

I am not sure investors or analysts see the full potential that Square has in this area. Or maybe they see it, but it is too much long-term thinking for them.

The Potential Multibaggers' qualifications

For my Potential Multibaggers, I have a set of qualities that I look for. Let's look if Square has got the qualities of a Potential Multibagger.

1. The company must have a good story

Now, this may seem petty, but companies that have ideas that they can articulate well and make investors enthusiastic about will probably have the same conviction in trying to win their customers. It is always great if you can summarize what the company does in one sentence that everybody understands. For Square, I think that after this earnings call, with the huge growth of the Cash App and the remarks of the management, you could easily say: 'Square, the bank of the future.'

Square has reapplied for a banking license. The fact that it takes so long (the first application was already in 2017) is just because the technology and infrastructure of Square as a 'bank' is so new for the Federal Deposit Insurance Corporation (FDIC), the institute that grants the licenses.

2. A visionary leader

One of the most valuable aspects of growth stocks is having a visionary leader, someone with exceptional qualities who knows where he or she has to steer his or her company to surf the wave to the future. I especially, but not exclusively, like founder CEOs, since they have had the drive and the capacities to start something and to make their baby big. Another great asset is if they are great communicators since they can probably bring their message across both to the (financial) media and their team.

Do we really have to talk about this for Square? Square's CEO is Jack Dorsey, one of the most visionary CEOs of our time.

(Jack Dorsey, source)

Jack Dorsey first developed open source dispatching software, some of which is still used today by taxi companies, then founded Twitter (TWTR) and in 2009 Square. So yes, the man knows a thing or two about communication.

He is sometimes criticized by both Twitter and Square shareholders that he doesn't focus on one company. But look at almost all big visionary CEOs of this time: they all have multiple companies. Jeff Bezos also has Blue Origin besides Amazon (AMZN). And the Washington Post. And then we don't count the numerous companies inside Amazon: Audible, Goodreads, Zappos, Wholefoods etc.

Elon Musk? The same thing, as you probably know: Tesla (TSLA), SolarCity (incorporated in Tesla now), Space X. Oh and NeuraLink, The Boring Company, and all of his other projects. And that was after selling PayPal (PYPL) of course.

Steve Jobs? Apple (AAPL) and Pixar, which was then later acquired by Apple.

Despite his years of experience, Jack Dorsey is still only 42, which means he can be CEO of Square for decades to come.

3. An innovating company

A growth stock must be innovating. If the company doesn't innovate, it won't have growth. The Austrian-American economist Joseph Schumpeter, one of the most influential economists ever, coined the term "creative destruction" in 1942. In "Capitalism, Socialism and Democracy," he defined it as the:

Process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

For Square, this is a reality, more than for maybe any company of its size. The products that have launched in the last five years now contribute to more than half of the total revenue, which you mostly only see in companies that are much smaller than Square already is:

(Source: Q4 2018 earnings slides)

So, there is no doubt that Square keeps innovating. And it also innovates in different areas: food delivery with Caviar, corporate catering with Zesty and web hosting for online shops with Weebly.

4. A long-term vision

Mostly I'm a buy-and-hold investor. In my bio here on SA, there is the sentence that I think defines me very well: I don't think in years but rather in decades. As a consequence, I pick stocks of companies that have a vision for the future and that I believe will thrive over the next decade(s). I know that predicting is hard, especially about the future, but what I mean is: I want the company in the sweet spot of what I think is a new evolution in a market or submarket, preferably, of course, a secular trend.

Square is certainly such a stock. It invests in its fintech and does that for the very long term. There has been much talk about the cashless society, but I think we are only in the very first inning here.

As I have already mentioned, the end goal for Square is the consumer market and banking services. But the approach is step by step and with a clear destination, like only a company with a long-term vision can.

5. At least double-digit growth over the next five years

I want double-digit growth over the next five years because otherwise, it is impossible to evolve from a Potential Multibagger to a real multibagger. Finviz.com expects 50% EPS growth for Square over the next five years. This is the expectation that FAST Graphs gives:

As you can see from the graph, Square's EPS is expected to grow exponentially over the next few years. For 2022, there is an expectation of 26% but that is still far away. The conclusion is that Square really will continue to grow enormously. And that is even without the introduction of new products or acquisitions.

6. The three Os

This is the last point on the checklist for potential multibaggers. Stocks that want to be picked as a potential multibagger should have as much as possible of what I call the three Os: overachieving, owning, and overdelivering.


Being the CEO of two multibillion companies? I call that overachieving. Taking on PayPal's Venmo with Cash App, even if PayPal has a market cap of more than $110B? I call that overachieving. Trying to become the new banking service, undercutting banks who have had the monopoly for this for centuries? That is overachieving Squared.


I like executives that have skin in the game. If the stock does well, they will do well financially too. Their interests and that of the stockholder are aligned.

According to Forbes, Jack Dorsey owns more than 60 million shares of Square, good for 85% of his wealth. His 2% stake in Twitter is responsible for just 11% of his wealth, which I also think is telling.

According to Square's most recent SEC filing, there were 405.731M shares outstanding for Square. If this information is correct, Dorsey owns almost 15% of Square. That is extraordinary but also typical for the best founders-owners of this time. Jeff Bezos still owns about 10% of Amazon and Elon Musk even has a stake of more than 20% in Tesla.

But Dorsey also did something extraordinary for Square. In 2013, he gave 10% of his stake in Square back to the company. 10% of his shares was about 3% of the whole company then since Dorsey owned about 30% of Square. The reason: he wanted to thank his team but without diluting the owners. Just to give you an idea: that stake was worth around $100M then and would be worth almost $1B now. Those kinds of gestures create loyal and motivated employees, of course.


If you look at the growth in the stock price of Square, I surely would say that this is over-delivering already. Here is the graph of Square's stock price since its IPO compared to the S&P 500:

Chart Data by YCharts

I have stated several times, though, that the stock price doesn't tell anything on its own. It is just a barometer of the stock market's sentiment but doesn't always tell you that much about the company behind the stock. You can read more about this in my previous article, 7 Suggestions For When Your Stocks Fall.

At this moment, Square's stock price has fallen 26.5% from its top at $101.15 at the beginning of November 2018. But after the Cash App results were so good, I wouldn't be surprised that it surpasses $100 fairly soon again.

But Square is also an over-deliverer on earnings, not just on stock price performance. These are the last four quarters, for example:

Square beats earnings expectations stock

(Source: Seeking Alpha)


This is the point that most value investors have their doubts about. They look at all kinds of ratios and say the stock is expensive. But look at all the great companies of our time, they all are or were very expensive if you just looked from traditional ratios such as P/E: Amazon, Tesla, Netflix (NFLX), Google (GOOG) (GOOGL) (before it became Alphabet), Facebook (FB)... Ratios just don't matter that much as qualitative elements for growth stocks.

With a P/S ratio of 9.5, Square is certainly not extremely expensive for a high-growth stock. Just to compare: Okta (OKTA) stands at 25 and Zscaler (ZS) at 30, for example. That doesn't mean I don't like these stocks, to the contrary: I own both of them, but Square has a huge potential for expanding and high-profit margins over the long term too. Just think of the potential Square has internationally, where it has barely scratched the surface.

I know you cannot really compare between different industries, so let's do it in (more or less) the same sector: fintech. Visa (V) P/S: 15, Mastercard's (MA): 15. PayPal is valued at a P/S of 7.3. So, Square may actually be relatively moderately valued. But again: the companies are not identical and ratios are always relative, so on its own, this doesn't mean all that much. Qualitative research stays the most important to me.


I think Square might be a Potential Multibagger over time, despite the fact that it has already a market cap of more than $30B.

If you see the huge potential of the company as a sort of alternative for traditional banks, I think it might become one of those mega-companies everybody knows, like Visa or Mastercard. With the drop after earnings, I have added again to my position and I consider Square as a core holding for my portfolio, probably for decades.

This was the ninth installment of the Potential Multibaggers series. More episodes will follow. If you don't want to miss those, feel free to hit the follow button next to my name.

In the meantime, keep growing!

Disclosure: I am/we are long SQ, MOMO, WB, BZUN, AMZN, FB, SHOP, OKTA, ZS. 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.