Square, Inc.

SQ Details

Square, Inc. (NYSE: SQ) is a payment processing company that enables businesses to accept card payments, which was previously inaccessible to many businesses and merchants. SQ has two business segments: 1) Seller, which includes managed payment services, software solutions, hardware, and financial services for sellers, and 2) Cash App, which includes peer-to-peer payments, bitcoin, and stock investments for individuals within the mobile Cash App. As of July 19, 2021, the company’s market capitalization stood at USD 108.16 billion.

Acquisition of Crew: Crew, an employee platform for improving the day-to-day operations of workforces, was acquired by the firm on July 14, 2021. Square's existing ecosystem of business solutions will be strengthened by the acquisition of Crew, which offers sellers an integrated, one-stop shop for messaging, scheduling, monitoring, and paying their team members.

Q1FY21 Results: SQ reported a sharp uptick of 3.66x YoY in total revenues to USD 5.06 billion in Q1FY21 (ended March 31, 2021) compared to USD 1.38 billion in Q1FY20, due to an 11.47x increase in bitcoin revenue. In addition, net income increased to USD 39.01 million in Q1FY21 compared to a net loss of USD 105.89 million in Q1FY20. As of March 31, 2021, the company’s cash balance stood at USD 3.67 billion, with a total debt of USD 3.75 billion.

Key Risks: The company had two third-party payment processors that accounted for approximately 59% and 27% of the total settlements receivable as of FY20, and three parties represented approximately 48%, 29%, and 9% of the total settlements receivable as of FY19. The excessive concentration of certain payment processing companies could harm SQ’s financial situation in the long run.

Outlook: For Q2FY21, SQ expects its non-GAAP product development, sales and marketing, and general and administrative expenses to increase by approximately USD 120 million compared to Q1FY21. For FY21, SQ expects these expenses to increase by approximately USD 1.0 - USD 1.1. billion as compared to FY20.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SQ Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: SQ stock price significantly increased by 93.56% in the past 12 months and is currently leaning towards the higher end of the 52-week range of USD 117.00 to USD 283.19. The stock is currently trading above its 50 and 200 DMA levels, and its RSI Index is 47.52. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 195.81. Considering the significant rise in share price of the company, decent financial performance, over-exposure to a volatile market instrument, associated risks, and current valuation, we recommend a "Sell" rating on the stock at the closing price of USD 233.69, down by 1.61% as of July 19, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

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