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.

(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:

(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)

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.

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.


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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Sunday, January 17, 2021

Portfolio Updates (January 2021)

 Equity market had a good start of the year and STI has finally touched 3000.00 last Thursday! But it felt short of my expectations as I was hoping the index to breakthrough 3,000 psychological support/resistance on Thursday itself.  Hence I am expecting some pullback before it stays above 3,000.

Whereas Nasdaq continued its climb to record high but ended modestly lower last Friday when Biden announced his $1.9 trillion stimulus plan and his tax proposals. Well that's the nature of stock market which the stock price reacts to every news that's going on but at least we can assured that market ups and downs won't be caused by single tweet anymore.

(1) Dividend Portfolio

Reits and bank shares in my dividend portfolio performed well in January which were lifted up my gains in STI and Hang Seng Index. Unfortuntately, I closed all my positions in Nikko AM STI ETF on the 6th Jan, just before STI's amazing run on the 7th and 8th January. Well that's life: you gain some you lose some. I also sold NikkoAM-STC Asia Reit on 30th Dec. 

Divesting UOL/Raffles Medical Group/CICT

These are small positions in my portfolio and I have mentioned in my earlier blogpost that I wished to sell it off through Standard Chartered asap. Unfortunately, it is still in the process of transferring those shares from DBS Treasures/CDP to StanChart custodian and it's taking forever. Nevertheless I sold 1,000 Thaibev last month for the same reasons: stock position is too small to be meaningful.

 Also, I have closed DBS treasures account since they don't allow selling/buying odd lots and charges a minimum fee for US/HK stock. It is probably a good thing after all, since I will have lesser stock platforms to manage.

Once all is completed I will have 18 shares in my Dividend Portfolio.

Lendlease Reit

It's the only share that I have added into Dividend Portfolio since December at $0.73, $0.75 and $0.755. I went to Somerset313 ad JEM during Phase II and I already felt like pre-covid times with the long queues and crowd. Coupled with travel restrictions in place, it will benefit from local tourism. Also not forgetting Sky Complex In Milan which has a WALE of 11.6 years, fully leased to Comcast Cooperation and contributes 34% of Net Property Income with annual rental escalation(based on ISTAT (1) consumer price index variation). According to management, broadcasting operations continue to be stable and rental has been collected in a timely manner with no waiver rental granted. 

While its hard to calculate its annual yield especially it has only paid out dividend twice, if we assume that it achieves its projected dpu of $0.0380, we are looking at yield of 4.6% at current level. Not too bad in the current low interest environment. Not forgetting that this Reit still has ample growth opportunity will gearing ratio of 35.6% and borrowing costs of only 0.86%

Currently it's still trading below book value of $0.85 and it's still attractive considering its strong sponsor acquisition pipeline and that most retail reits in SG are trading above their book values. 

Redevelopment of Grange Road Car Park will strengthen Lendlease Reit's presence in Somerset Area

(2) Growth Portfolio

Last month, I closed my position on Aptiv PLC at $128.01 netting a gain of  27.5%, and Berkshire Hathaway at $229.65, gain of 31.6% and trimmed down on Arista Networks at $290.16,

I used the proceeds and cash to average down on Zoom, Square and Alibaba and initiated new positions on Lemonade and Fiverr and Salesforce. I will be writing a separate blog on Square which will be up within a weeks time. 


I believe much negative sentiment have already been priced in during the recent selloff with the antitrust laws, adrupt halt to Ant IPO and Jack Ma went missing. 

The stock is currently sitting at 31X PE Ratio, which is attractive for a growth company. Its Cloud segment: Alibaba Cloud achieved a YoY growth of 60% and management expects cloud segment to turn profitable in the next few months. They also further added that cloud computing is still in its early stages of growth and committed to further increase its investment in cloud computing.

A few days after anti-trust probe was announced, People's Daily published an article that the anti-trust laws are meant to help the tech industry and a necessary step to ensure healthy development of tech industry. I believe that after all, the success of Tencent, Alibaba, Meituan are the sources of national pride, and imposing crackdown on tech giants won't do any good to the Chinese Communist Party.

Stock Portfolio Net Worth

Late last month I deployed my cash at hand to topup to my CPF in Dec and used up part of my cash for investment, hence current cash is lower than prior month at $44,620.

Stocks Portfolio= $473,626

Cash at hand= $44,650

Total Portfolio value= $518,276

Portfolio 1 Net worth= $473,626 (growth+ dividend portfolio)

Portfolio 2 Net worth= $180,850.91

Cash at Hand= $44,620

Net worth (Cash+Equity)=$699,126

Goals for 2022- 88.76% achieved

Goals for 2030- 13.26% achieved

Closing remarks

Although I am ahead of schedule to achieve my 2022 goal of $583,910,  I have to take into consideration that a market correction can easily wipe out months or years of investment returns, especially the growth portfolio. Hence I goal is to ensure my overall portfolio beats my expected portfolio value every year so that if market ever gets beaten down, I can still achieve my financial goal in 9 years time.

I will be putting the pen down for now, as I am recovering from food poisoning as I wrote this. Since late Dec, I have did quite abit of research on Square (SQ) and did valuations by discounting the Unlevered Free Cashflow. Will post it once I have completed the writeup. If you enjoyed reading my blogs and wish to be notified whenever a post is up, do support me by liking my Facebook page here. Currently, I do not earn any fees through any affiliate programme or sponsor.