Monday, February 22, 2021

Portfolio Updates (Febuary 2021)

 Hi all!

Hope everyone had a good CNY celebration or at least a good break! I was not well the past few weeks due to severe headache. It happened almost everyday for an hour or two and overcome by periods of lassitude after that. I went to see GP a few times and neurologist and they concluded that it was a primary headache with unknown cause and I just needed to find the trigger. Yet I breathed a sigh of relief knowing that it’s has nothing to do with my brain or any neurological disorder.

I didn’t manage to find the trigger, but I made positive changes- drink more water, eat more fruits, rest more, improve my posture and it miraculously went away. I have been headache free for almost two weeks. Currently my work and meetings are behind schedule and there is much to catchup but won’t stress myself too much.

As of writing, stock market in US and HK is experiencing some sort of retracement and Straits Times Index is still struggling to catchup but I am thankful that my portfolio value still went up overall. As mentioned in my blogpost on 17th Jan on the SG counters to sell, I have finally sold them on 27th January via odd lot market in Standard Chartered. To my surprise, $10.70 was charged for asset transfer fee per counter. I remembered that fee is chargeable for share transfer out of Stan Chart, not the other way round.

Other than divesting I made no changes to my dividend portfolio but looking forward to shares going XD and collecting dividends! As for now I have no plans to add any counters to dividend portfolio.

(1) Dividend Portfolio


(2) Growth Portfolio


I sold Palantir last month at $29 -2.08% for two reasons. (1) The business relies on a few key clients which means high customer concentration risks. According to SeekingAlpha.com, the top 20 customers accounted to $495 million which forms 67% of total revenue in 2019. Hence, one or two contract cancellations will cause significant hit in Palantir’s revenue in the short run. While there are encouraging signs that Palantir managed to secure more clients to diversify their revenue and actively scaling their commercial business, the value they bring into client are somewhat uncertain until implemented. We are talking about a multimillion-dollar deal for a solution which may not work until it’s tested and tried. I must admit as well that (2) I don’t understand Palantir’s furtive business potential well enough to determine its future outlook and hence I choose to sell at a slight loss and stay at the side-lines for now.

I also closed all my position in Facebook at $269.33 +52.98% because I have lost interest in this company and I didn’t just feel like owning this share anymore. That means that I am unlikely to keep up with the company’s prospects, get updated on earnings report even notice when a red flag comes up, so I decided its better off selling and locking in the gains.

As for MasterCard at $342.44 +31.09% and Starbucks at $105.00 +25.28% I still see value and their ability to grow, but I sold them as my positions in these two shares are too small such that the shares movement hardly will move a needle for my portfolio. I will be using the proceeds to pursue stocks with better growth opportunities, probably in the field of genome testing. I am closely watching three companies: Invitae, CRISPR Therapeutics and also Fulgent Genetics. I particularly like Fulgent Genetics because of its agile business that it’s able to tap its expertise in genetic testing into Covid 19 testing. As a result, its revenue surged 880% year on year and outperform its genetic testing peers. That being said, I felt that the stock price went ahead of its fundamentals last month due to short squeeze caused by the GameStop saga. It had very high shorting interest and probably short sellers went in to cover its position. I am waiting for the stock price to drop further before adding.

My new positions this month are Vuzix which I entered at $15 and Netflix at $558.

On top of those, I have added more Tesla shares at $838 and $894, Disney at $162,and Fiverr at $300.

New shares that I am closely watching: AirBnb, Fulgent Genetics, CRISPR Therapeutics, Invitae, and Intuitive Surgical.

Currently, the Dollar Costs Averaging for Tencent Holdings has paid of well. Rain or shine, it's HK6,000/month into the tech giant. 

I also added a small position on Bitcoin to hedge against inflation but shall leave this for the next post.

Stock Portfolio= $492,398

Cash at Hand= $46,700

Total Portfolio Value= $539,087



Goals for 2022- 92.3% achieved

Goals for 2030- 13.79% achieved

Portfolio 1 Net Worth (Dividend+Growth) = $492,398

Portfolio 2 Net Worth  = $186,194

Cash at Hand=$46,700 

Net Worth (Cash+ Equity)= $725,292

Wrapping up

Be Prepared for a Stock Market Correction

Although I have made much progress compared to last month, I think there’s nothing to cheer about yet because a market downtrend can wipe out months of  my portfolio returns in a few days. The US stock market is trading at a valuation as if Covid-19 is behind us. It seems like a market correction is imminent and overdue. As to when, my best guess is second half of the year, but you know that your guess is as good as mine.

The greatest lesson I learnt this year -Health is Wealth!


The headache episodes have truly given me a sober reminder that health is wealth. The headache just came randomly, and its pain intensity was as bad or worse than migraine and there’s nothing I could do than to just sit in one corner or inside my car and close my eyes. I began to reflect that we often strive for financial success often to the detriment of our health, and truly understand the value of health when we have had it and lost it again. During the time, my portfolio had a good run with HK counters and US stocks breaking all time high , but I am not in a mood to even think about it than just praying my headache to disappear. When it disappeared, I worried and feared for the next headache episode.

However, if you are young and healthy and you are reading this post, count yourself lucky or perhaps you are older, not to worry s you still have time to look after yourself. Getting to bed early, regularly exercise and mentally taking time out to relax and recharge are very important.

I set four core values this year- (1) wealth, (2) career and (3) health and (4)spirituality; and health will be one of my top priority from now on. We strive to get rich so to achieve the ideal lifestyle or financial freedom. But what’s the point when we are financial free, or achieved the Finance Independance, Retire Early (F.I.R.E) movement in our 30s, yet suffering in pain and don’t have the good health to enjoy it. Some people I know have shared with me that in their younger days, they trade their health to gain more wealth and then spend their wealth in later years to regain their health. That’s why now I better understood Warren Buffett’s wisdom that the by far best investment your can make is in yourself and I am sure he also meant not just education but health as well. Stop neglecting your health and change for the better because you deserve it!




So stay healthy and invest safely and talk to you in the next post!

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)



Thursday, February 18, 2021

Why Fiverr is a potential multibagger in the making?

Fiverr is an Israeli online marketplace which connects freelancers with buyers. It was founded in 2010 by Micha Kaufman who is also the current CEO and claimed to have started the concept of Service as a Product by offering digital services in exchange for a small fee. The popular service that was offered during its earlier days was Logo design for $5 and hence its name, Fiverr. The platform began to grow as more services are being offered, bringing freelancers from offline to online and digitizing their services.

For instance, if a buyer wishes to source for a gig worker to design his website, he can pick the ideal freelancer by reading reviews, pricing, asking a few questions. If the end-product is not satisfactory, the online gig could either raise a dispute or cancel the order and funds will be reimbursed to the buyer’s account.

Back then, I was a customer of Fiverr before I invested in this stock. I first got to know this company when I was looking for a freelancer to optimize my LinkedIn profile and I must admit that I was spoilt for choice when I was scrolling through the list of freelancers.

The experience was smooth and since then I have been regularly using Fiverr. Also, I need not worry about freelancers failing to deliver the finished product or go missing as it is in the interest of the freelancers to make us feel satisfied with the product so that they can receive positive reviews.

When I came to know this stock late last year, it has already gone up 10X since its listing. In fact, you will be surprised that it outperformed Tesla in term of 1 year return. Yet the 10X return make sense as Covid-19 pandemic has increased motivation for business owners to work with freelancers and working from home has encouraged full time workers to try out freelancing. And Fiverr is one of the best platforms to start with, as it matches the freelancer with the right buyers without the need to spend on marketing or upfront meeting costs.


And the numbers in 3Q 2020 proved to be true with strong revenue growth and smashing analyst expectations.

Despite going up 10x since it’s IPO price of $21, I believe it has much more room to grow and I got in at average price of $ 241.

Here are a few reasons which I believe that the best for Fiverr is yet to come!

1. Moving further upmarket

Fiverr Pro

Fiverr derives its Revenue using the formula: Active Buyer X Spend Per Buyer X Take rate. And moving upmarket is to increase the spend per buyer and hence Fiverr pro was introduced back in 2017. What sets the Pros apart from other freelancers is former experience in working in big and influential brands and having unique field of specialization. Generally, they attract big companies which require high end professional work as well as working on milestone. For instance, a movie production involves script writing, shooting each scene and video editing. Hence with Fiverr Pro, global brands can hire a specific pro which specialize in each milestone. If the Pro fails to meet the required standards, they can easily replace with another Pro to complete the project without spending money on hiring costs and dealing with regulatory compliance by hiring and firing.


Fiverr Business


Fiverr for Business was launched in the middle of the pandemic to define the future of work. It is tailor made for business teams collaborating on a project and needing to hire a freelancer. For instance, a group of employees developing a new advertisement can head over to Fiverr Business Platform to source for the right gigs and have a group chat functionality or setting up a Zoom call to discuss on the progress. Imagine having tight deadlines and having to submit your project the next morning. With Fiverr Business, the team can outsource the job to freelancer in US and brief the seller on the requirements and get the completed work the next morning.

Fiverr is offering first year free to capture the market share but will be chargeable at $149 for annual subscription. With Fiverr Business, HR need not screen through resumes and or conducting job interviews to hire a part time staff to complete a project. All it takes is $149 and Fiverr does the handpicking of the best talent who has what it takes to cater to business audience and certain level of professionalism in the way they communicate and getting work done.

2. International Expansion

Olá: Fiverr Announces a Portuguese-First Website for Buyers and Sellers in Brazil


In the past few years, Fiverr has successfully expanded into European markets and recently announced their expansion in geographic footprint to Latin America countries. While Fiverr is already globally accessible, international expansion means offering the possibility accepting local currency via local payment methods and presenting in their own native language which in turn increase take up rate and a better platform experience. For instance, to capture the market in Brazil, Fiverr has successfully launched its service in Potuguese (native language of Brazil) and start accepting Boleto and Reis (payment method in Brazil). It paid off and Fiverr saw a 137% increase in freelancing service from Brazil. The same can be said for Mexico, where Fiverr offered a local language site and allows local payment in cash through partnership with Oxxo, a leading convenience store chain. With that, Fiverr saw a 100% uptick in Mexican freelancers joining the platform.  These shows Fiverr’s ability to scale to capture more market share to strengthen its ecosystem of freelance service online.

3. Huge Total Addressable Market

There has been a trend towards gig economy and Covid 19 has only helped to expand exponentially. As retrenchment is prevalent during pandemic times, gig firms such as Grab Delivery or AirBnB helped to reduce the strain on unemployment and put food on the table. While the pandemic will eventually disappear, I believe that the world has already embraced this new way of working. Even those who found their full time job may be open to selling their services on Fiverr after their work hours, and drivers would embrace hitch to earn extra income on commuting. Perhaps Covid-19 is all it takes for many to find out that full time employment may not be their cup of tea after all— it lacks freedom, flexibility, and ownership. In general, millennials grown up in a world shaped by technology and start-ups and they are more willing to tolerate changes and uncertainty in their work. In exchange for job security, they strive for some ownership in the work they do and the freedom to work anywhere and anytime they want— by the beach facing the sun with their toes are squishing on the sand or even in a café overlooking the winter scenery with falling snowflakes.

You can freelance anywhere with a laptop and internet connection
Source: thriveglobal.com


This translates to more companies adapting to this new way of working and hiring workers. After all, it is more cost efficient than hiring a full-time employee and they can save on taxes, worker compensations, applying work permits and pay bonus. They also save on office space to house hired employees.

One good example which gig economy is disrupting is the healthcare sector. There has been growing interest in telemedicine, and thanks to start-ups and app which allows anyone to connect to a physician at the comfort of their home via video call and medication delivered to their home. I won’t be surprised if Fiverr will onboard physicians to provide teleconsulting soon.

Teleconsulting on the rise. Photo source: Business Times


As more professions starts to embrace and participate in freelancing service, I believe Fiverr will be in a position to capture more market share and in the process to strengthen its moat becoming a central big force in the gig economy. 

Valuation of Fiverr

I will be using two step discounted free cash flow model to determine the intrinsic value of Fiverr.  I will start with forecasting the Q4 earnings and project it’s free cash flow and then combine with the past three-quarter results to get Full Year earnings and FCF.  The next step would be to project the next 10 years financial results and perform the DCF to calculate its per share value.

Step 1. Determine the net income of Fiverr



Management have provided guidance that Q4’s Revenue would be in the range of $52.4 to $53.4 mil. Therefore, I will be take the higher end-  $53.4mil. 

I am not being unconservative here considering that management always under promise and overdeliver the performance. In Q3 guidance, management projected $48-$49mil guidance after raising guidance yet achieved $52.3mil.

Its gross profit (GAAP and non-GAAP) has increased over the years which signals the higher potential for profit and I will use the same gross profit margin (GAAP) of 83.3%. The same margin as Q3 will be used in deriving the list of operating expenses.

Improving Gross Profit Margin every year

Step 2: Derive Trade Receivable and Trade Payable using an average of DSO and DPO for the past 6 quarters.




 Step 3: Determine D&A and obtain Free Cash Flow for Q4 2020.

Depreciation and Amortization & Share Compensation

The D&A shown in Cashflow statement consists of:
D&A from Costs of Revenue + D&A from Operating Expenses

The same goes for Share Compensation

Share Compensation from Costs of Revenue + Share Compensation from Operating Expenses

D&A and Share Compensation from Operating Expenses


For D&A and share compensation from Operating Expenses, management did a breakdown on the Operating expenses due to Depreciation and share-based compensation (see above). The purpose is to show the GAAP vs Non-GAAP earnings where non-GAAP does not take D&A and share compensation expenses to determine its EBITDA margin. To determine D&A and Share compensation to be added back to cashflow, I take the average of FY 2019 and 3Q 2020 Depreciation and share compensation as a % of the operating expenses.

Step 4. Work out the Cashflow for Q4 2020



Total D&A for Q4 2020= 587 (D&A and Share comp. from Costs of Revenue i.e. 1.1% of Q4 2020 Revenue) +151+468+59

= USD 1,265,000

Non-GAAP Gross Margin= 84.4%

Gaap Gross Margin= 83.3%

Hence difference in Gross Margin= 1.1% of Revenue which accounts for share based Compensation

US$53,400,000 *1.1% = US$ 587,400

Although the difference between GAAP and Non-GAAP consists of Share compensation and D&A, I will lump under D&A for simplicity sake.

User Funds

This consists of buyer prepayments inclusive of company’s transaction fees which will be earned when once an order is completed. User accounts would be funds which is transferred to seller’s account upon delivery of the project. As the company doesn’t have the ownership of the funds and they usually cancel off each other since payment is transferred from buyer to seller eventually, I would not include it in my FCF calculation.


Capex as a % of Revenue stays at 2% in past years. I will be excluding business acquisition of ClearVoice, Inc, in Feb 2019 amounted to US$ 9.9mil, since it is a onetime expense.

Step 5: Projecting future Net profit



Step 6: Determine Depreciation and Share Compensation as a % of Operating Expenses for next 10 years and beyond



Step 7: Determine working Capital for the next 10 Years and beyond



Step 8: Calculate the Free Cash Flow

 


Summing up present value = US$3,031 which is 9.5X the current price, almost a ten bagger. I believe there’s more upside to this stock compared to Square, since the next 10 years of cashflow adds up to US$219, which made up of 68% of current share price.

I am getting this blog post up ahead of earnings release in a few hours time and I can't wait to see what's in the cards as Fiverr reports Q4 earnings.

My Transactions


Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)




Saturday, January 23, 2021

Why Square has potential 100% upside (in the long term)

Square stock had a strong run up in 2020 with year to date returns of 247.84%, and currently it is trading at a price to sales ratio of 14, and price to earnings ratio of 310. Such nose bleed valuations implies that high growth expectations has been baked into the stock and investors are betting on the company to deliver stellar growth.

When I added Square

When the news of the discovery of Covid 19 vaccine broke, there has been a slow rotation of ‘work from home’ stocks to ‘back to office’ stocks and I took the opportunity nibble some Square shares with the hope to increase my position as it drops further. Unfortunately, the dip was short lived, and currently Square is just $18.7 away from its all time high of $241.58. After doing some research, I decided to add a few more shares near its high as I believe there is still plenty of growth remaining.

History of Square

Square’s root can be traced back to 2009 when James Mckelvey who run a studio business faced a dilemma on whether to accept credit cards. Accepting credit cards would mean profit margin gets eaten up by the credit card fees, whereas not accepting it would mean losing its customers who only has credit cards at the point of purchase. He then got in touch with his friend, Jack Dorsey to build a device to accept credit card payments in the form square shape reader which can be plugged into a headphone jack. After it was invented, the duo approached Cheri Mims, owner of Lilybelle Flowers who just lost a sale from a customer who could only pay by credit card. Back then, banks were reluctant to work with small shop owners to setup credit card terminal due to insufficient credit worthiness. She was initially sceptical at first but decided to give it a try and the rest is now history. 

Square then began shipping many readers to small business owners for free and their business grew from all the transaction fees it collected. In Oct 2015, Square filed an IPO to be listed in the stock exchange.

As Square became widely adopted, they launched Square stand, which replaces the need for a cash register and a range of accounting software. It is sleek, stylish and easy to set up which also attracted mid to larger size companies to use its services.

While on its way to build a payment ecosystem, Square launched Square capital, where they partner with financial institutions to financing to small business seller which solved many of the pain points merchants faced. Back then the business startups could not get access to capital from traditional banks due to lack of customer basic and lack of management. They have to turn to their family members for funding. In Square Capital, they access the loan size without using traditional credit scores, but artificial intelligence based on real time revenue and the number of swipes on square terminal. In turn, the merchants pay back their loans by the average daily card swipes.

Cash App

To go beyond serving business needs, Square launched its digital wallet called Cash App, which is a peer to peer payment service to compete with fintech companies like Paypal’s Venmo, GPay and Apple Pay. The app enables consumers to make payment via their mobile devices and transfer funds to their friends and family, via email.

In Singapore’s context it is very similar to Grab Pay app, DBS’s PayLah and Singtel’s Dash.  If seller and consumer can transact via Cash App, Square earns money from both parties: by charging 2.75% per transaction to business and a fee when consumers use credit card on Cash App.

Square’s four sources of Revenue Stream

Square classifies its revenue into four categories: (1) Transaction Based Revenue (2) Subscription and services based revenue (3) Hardware Revenue and (4) Bitcoin Revenue. Effective from June 2020, Square further split its sales to 2 components: Seller app and buyer App to reflect two big ecosystem which it serves.



(1) Transaction Based Revenue

This is where most of the Square’s revenue comes from and it’s the bread and butter of Square’s business. Square basically collects a fee when there is a transaction:

Sellers App

i. Sidecar payments using Square’s terminal. The standard processing fee is (2.6%+$0.10)

ii. Apps such as virtual terminal/Square Register/invoices 

iii. Square for Retail/ Square Appointment (2.5% to 2.6% +10 cents) processing fee below 10 staff calendars as well as other 3rd party apps (charges vary)

Cash App

Square collects a fee when topping up Square’s debit card using credit card and cash for business. The latter is essentially a business version of cash app, where users can set up a business account using their cash app to collect payments and Square earns a fee from the transactions.

https://www.fundera.com/blog/square-cash-for-business

(2) Subscription and Services (SaaS model where square collects a subscription fee for using its software)

Seller App

i. Apps such as Square for Retail & Appointments/ Square Team Management
Team management allows the employer to track the team members working hours using timecards

ii. Flexible loans repayment and instalment

iii. Square instant transfer and square card

iv. Website hosting services- Weebly which they acquired in 2018

Cash App

i. Cashcard Interchanges and boost Rewards- a discount programme attached to cash card and gives discounts to various retailers. It’s quite similar to shop back Go but this programme is only available to Square’s Cashcard. Find out more here: https://www.youtube.com/watch?v=JWrA1PSbXYo

(3) Hardware Revenue

Sellers App

i. This segment’s profit is still in the red as their focus is to attract more new and bigger sellers to use Square Terminal and Register. Hence, they have been lowering their price to increase the adoption rate of their hardware which translate to more transaction and subscription revenue.

(4) Bitcoin Revenue

Buyers App

This revenue includes value of bitcoin transaction and hence not a meaningful segment of Square’s Revenue.

Growth Drivers

1.Moving Up-Market

One of the ways to grow its business is by having more new sellers adopting its services which then translates to more transaction and Saas Revenues. And the chart below shows that is not only able to increase its clientele but also improves the gross profit per seller. Management has commented that it is due to the newer customers acquired continued to be in the upper segment, i.e. mid market and above.

Gross Profit per seller went up 2.3X in 2 years!



I have touched on earlier on how Square had their humble start in serving micro merchants and it continues to be their bread and butter. They are currently expanding to serve the mid-market.

While there are more micro markets seller than the remaining sellers combined, the combined SMB and Mid-Market adds up to $5.5 trillion, which is 12.3X of the current market they are currently serving.

One of the key drivers that allows Square to capture larger merchants is through its Open API which essentially means allowing more technically sophisticated customers to write their own point of sales system using Square Reader SDK to meet their exact needs and specifications.

For instance, Shake Shack has partnered with Fuzz to build a self-service kiosk where customers can order and make payment own their own using Square Reader SDK to build a customer, in-person checkout experience. Similarly, Joe and Juice adopted Square Reader SDK and integrated with Square stand to build a customized checkout flow for customers buying coffee. Currently they used these terminals in 44 stores in US.

Shake Shack partnered with Fuzz to use the Square Reader SDK to power a self-service kiosk. (Photo: Business Wire)


2. 
Investing and cryptocurrency Trading

On the buyers side of the app, management has commented that Cash App’s indicator of success is determined by its volume of direct deposits. Users who uses direct deposit to cash app tends to carry higher balances and uses more of their platform which is part of their monetization strategy.

While commissions earned from Cryptocurrency and investing isn’t significant, it allows users to invest their surplus funds in their CashApp without the money leaving the platform. As Square has demonstrated history of innovation and will continue to innovate with rolling out new solutions, it creates multiple monetization opportunities with the funds that users kept in the Cash App.

In case if you are wondering how much it could potentially grow, Cash App currently only penetrated less than 2% of the $60b opportunity. That excludes the opportunity to expend to overseas market and new products to penetrate into new markets.





3. Further monetizing Cash App

This is perhaps the most significant growth driver for Square moving forward and will probably overtake the buyers app in terms of revenue and profit.

https://www.businessofapps.com/data/cash-app-statistics/

Although Cash App started in 2013, its growth showed no signs of stopping. During the Pandemic year in 2020, its Monthly Active Users surged to 30mil users, representing 62% YoY growth since 2017. Coupled with its P2P functionality, this further creates a network effect which attracts more new users and keep them engaged in the platform.

Once these users introduced into this ecosystem, they can be exposed to its features that helped to drive its revenue, such as its Cash Card facilities which Squares takes a cut from buyer and seller Ecosystem. With its proven ability to innovate and the improved product adoption, it can continue to a powerful growth driver considering that it has a huge TAM and the largely untapped global market.

Hence investors should pay attention to Cash Apps Annual Revenue per MAU, which is $30 in 2019 up from $15 in 2017.



Valuation

I will be doing Square valuation using discounted Cashflow method by projecting its unlevered Free Cash Flow and discounting it to present at a rate of 7%.

Firstly, I will breakdown Revenue generated from two segments: Cash App and Sellers App to derive their respective gross profit and then combine the gross profits to calculate and project Unlevered Free Cash Flow.

I will be excluding Bitcoin Revenue for two reasons. First it is unmeaningful with Gross Profit Margin (GP Margin) of 1-2% and it's derived from the total sale of bitcoin to customers. Management too believed in deducting bitcoin Revenue to better reflect actual company performance. Secondly including Bitcoin Revenue will affect the overall computation of GP Margin. Its GP Margins Nine months ended 2019 and 2020 is 75.99% and 80.79% and hence will be using margin of 80% in this calculation.

Step 1. Projecting Cash App's Gross Profit for 10 Years



Step 2. Projecting Seller's App Gross Profit for 10 Years



Step 3. Determine OPEX as a Percentage of Revenue

In order to determine operating expenses, I will exclude P&L Segement of Caviar which was sold to Doordash. It was a loss making business. Square's financial statement only includes breakdown P&L of Caviar for two years 2018 and 2019.

P&L Inc. Caviar ex Bitcoin





P&L of Caviar


P&L Ex Caviar Ex Bitcoin


Opex as a % of Revenue remained at 43% and 44% for 2018 and 2019 respectively which suggests that Caviar's P&L has minimal impact on the overal P&L. In addition, we can infer from the chart that Opex as a % of Revenue is trending donwards and hovering at 40%.






I will be using 45% from 2021 to 2025 and 35% from 2026 onwards for Opex as a % of Revenue to project Unlevered Free Cash Flow.

Step 4. Determining Investments in Working Capital

I used Seeking Alpha to obtain its values for Trade Receivables, Inventory and Accounts Payable and determine, DSO, DIO and DPO and Net Trading Cycle. Next, I take the average of DSO, DIO and DPO and Net Trading Cycle of the past five years to project the next ten years Net Trade Cycle and hence Investments in Working Capital.



Step 5. Determining Capex as a % of Revenue


Since 2015, Capex as a % of Revenue is hovering at about 1.5-2% of Revenue hence I will assume Capex as 2% of Revenue from 2021 to 2025 and 1% from 2026 onwards.

Step 6. Depreciation as a % of Revenue



Depreciation has been growing steadily but decreasing as a % of Revenue. To be on the conservative side, I will assume Depreciation to be 2% of Revenue throughout.

Step 7. Combining Cash App and Seller App


Summing it all up gives USD454.35, potential upside of  (454.35-222.88)/222.88* 100% = 103.85%. Despite having more than 2X upside, the next 10 years free cashflow is not really contributing to its present value and adding the fact that tax increase in Biden's administration could potentially drive down the intrinsic value of the stock. To expect a 100% upside, one has to assume that Square will continue to grow and stay relevant beyond 10 years.

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