Morningstar | Square Maintains Growth in 3Q
Square maintained its strong growth in the third quarter, as the company continues to shift toward services beyond acquiring. We believe that the company has a very strong growth runway in the near term, as it expands within its micro-merchant niche, makes some gains upstream, and cross-sells additional services. However, we believe the market is overly optimistic about Square’s long-term prospects and that the shares are materially overvalued. We will maintain our $44 fair value estimate and no-moat rating.Net revenue was up 51% year over year. Transaction-based revenue was up 29%, with a similar increase in gross payment volume. We believe there is still a lot of room for Square to grow within its micro-merchant niche, and that the company can continue to make some gains among small and mid-sized merchants. However, we also believe that the company’s relatively high pricing will ultimately limit how far upstream it can go.
Subscription and service-based revenue was up 150% year over year, and this area is becoming an increasingly critical engine. We think some services, such as Caviar, are obvious extensions of the company’s acquiring core and represent a meaningful and sustainable cross-selling opportunity. However, we remain concerned that other products, such as Instant Deposit and Square Capital, either rely on or display the potential vulnerability of the company’s micro-merchant base. Square Capital saw a 34% year-over-year increase in loan volume. While Square is careful to avoid taking credit risk, growth in Square Capital could quickly reverse if the economy turns or if the performance of these loans is poor. Further, we think customer’s attraction to these loans display the fragility of many of the businesses Square serves and highlight the company’s macro-sensitivity. We think it’s important to note that Square’s rise has taken place in the context of an improving economy and the company has yet to be tested on this front.
On a GAAP basis, Square actually moved to a slight profit for the quarter, but this was driven by a one-time gain. The company’s preferred profitability metric, adjusted EBITDA margins (which includes some questionable add-backs such as stock compensation), improved to 16.5% from 13.3% last year. This highlights the potential scalability of the business over time, and we think the expansion of subscription and service-based revenue will be critical to maintaining this trend. In the long run, however, we think Square’s potential margins might be limited by its relative lack of scale, compared with large traditional acquirers.
Square is a commerce ecosystem that combines software with hardware to enable sellers to turn mobile devices and computing devices into payment and point-of-sale solutions. With the company's offering, a seller can accept payments via magnetic stripe, Europay, MasterCard, and Visa, or Near Field Communication; or online via Square Invoices, Square Virtual Terminal, or the seller's website or app. Also, sellers can gain access to reporting and analytics, next-day settlements, digital receipts, payment dispute and chargeback management, security, and Payment Card Industry compliance. The company's Cash App enable individuals to send and receive money electronically to and from individuals and businesses.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.