Square, Inc [Ticker: SQ]


Introduction

Square, Inc operates as a “cohesive commerce ecosystem that helps sellers start, run, and grow their businesses” via a myriad of powerful programs and devices for payments and point of sale solutions. Unlike a vast majority of other solutions in the industry, Square allows sellers to utilize a single, centralized system instead of resorting to the patchwork-style of cobbling multiple systems together at once to get things running.


Simplified Income Breakdown

The first thing to look at, is how much raw money they’ve been generating; both recently and historically.

SIMPLIFIED INCOME STATEMENT
Year 2012 2013 2014 2015 2016
Revenue (Past 5 Years) 203.45M 552.43M 850.19M 1.27B 1.71B
Sales Growth % 171.53% 53.90% 49.04% 34.85%
Cost of Revenue 138.9M 423.65M 631.87M 910.15M 1.13B
CoR Growth % 205.01% 49.15% 44.04% 24.54%
SG&A Expenses 139.4M 215.77M 344.23M 476.82M 646.41M
SG&AE Growth % 54.78% 59.54% 38.52% 35.57%
Net Income -85.2M -104.49M -154.09M -179.82M -171.59M
Net Income Growth % -22.65% -47.47% -16.69% 4.58%

 

The table above is a small glance into Square, Inc’s income statements for the past five years.

Let’s break it down a bit from the top, descending.

Starting at their annual revenue, we can see that Square has experienced tremendous growth over the years since its initial public inception. In fact, from its revenue in 2012 of $203.45M, Square has grown to a revenue generating titan of $1.71B!

A growth of roughly 800% over the course of five short years.

Now, it is also true that the growth rate year-over-year has been on a steady decline. However, the numbers aren’t particularly harrowing and fall well within the realm of expectation. Moreover, while a declining sales growth percentage may not be the best of news nor the worst of news, a declining growth percentage on the Cost of Revenue does indeed bode incredibly well for the future of the company.

Cost of Revenue

The CoR grew roughly 25% from the 2015 to the 2016 fiscal year and while that may seem staggering at first, one must first keep in mind that;

  1. That number is down from roughly 45% during the 2014 to 2015 fiscal years, and…
  2. Revenue grew roughly 35% within the same time span.

So not only did the growth rate decline, but it also declined to a rate smaller than that of the revenue’s.

SG&A Expenses

Selling, General, and Administrative expenses also rose incredibly during the past five years, but looking at the growth rate, one can see that the trend has slowed down over the years as well. The growth rate is now at a relatively smaller percentage of 35%. While that number is certainly still quite large, the point is that it’s down from 55% just a few years prior.

The main point to see here is that both are slowing down considerably more than the revenue as a whole.


Simplified Cash Flow Breakdown

While it certainly is nice to know that the general gist of the Square’s income is looking positive; revenue is growing faster than the cost of revenue and SG&A expenses, it is still important to know just how that translates onto their cash flow statement.

Free Cash Flow -55.96M -108.51M -138.19M -9.85M -2.3M
FCF Growth % -93.91% -27.35% 92.87% 76.62%

 

For the past five years, Square has indeed been running deep in the red, no question about it. However, in recent, free cash flow has been on a powerful uptick, clawing out from a -138.19M pit of despair to the almost-open-air of -2.3M. It’s certainly true that the number is still negative, but having closed the gap and drawn so close to the black is an incredible feat.

With revenue still growing and the liabilities on the fall, a positive cash flow is looking to be their next big milestone.


Square Capital, A Capital Decision

Now a little over two and a half years old, many people can see the value of Square Capital; Square, Inc’s lending arm.

Revenue Breakdown
Year 2014 2015 2016 2014-2015 % change 2014-2015 % change
Transaction-Based Revenue 707,799 1,050,445 1,456,160 48% 39%
Starbucks Transaction-Based Revenue 123,024 142,283 78,903 16% -45%
Subscription and Services-Based Revenue 12,046 58,013 129,351 382% 123%
Hardware Revenue 7,323 16,377 44,307 124% 171%
Total Net Revenue 850192 1,267,118 1,708,721 49% 35%

 

In Square, Inc’s 2016 annual earnings report, the table above was their reported revenue breakdown. Looking at their Subscription and Services-Based Revenue, we can see the clear impact that Square Capital has had on that specific revenue stream. Growing over 1000% from 2014 to nearly $130,000,000 is a stupendous statistic! And even if the current revenue that they are pulling in from that stream isn’t comparable to their Transaction-Based Revenue stream, it will with time.

While there are plenty of pitfalls within the lending industry, primarily coming from competitors such as American Express, I still firmly believe that the market is ripe for Square to take hold of and grow into.


Conclusion

Square, Inc will become profitable sooner rather than later.

Perhaps it won’t be today or tomorrow. It may not be within the next quarter, even.

But within the close future, this company will easily enter the black and remain there as a top level competitor in the POS market and small-business lending market. While they are a bit highly priced right now and I do expect a pull back of some sort within the year, I believe that the possible upside still outweighs the possible downside. I am tentative to give out a price target of any sort at the current moment. Too much rides on the coming fiscal year and I believe it’d be pertinent to see how it plays out first.

In a future article, I’ll delve deeper into their specific market, how they operate in it, and how I feel they are doing at the moment.

But for now, this surface glance was more than enough to catch my interest and hopefully yours as well.

Disclaimer: I do not own any shares of Square nor do I plan on opening any positions in the near future. What is written here is solely my own opinion and I am receiving no compensation other than what I may receive from TickHounds.