Square: Living Off Bitcoin Hype (NYSE:SQ)

Regardless of warning buyers on the bitcoin hype fueled outcomes of Sq. (SQ), the market continues to pay up for the inventory. One other massive quarterly beat at all times helps gasoline momentum, however the numbers had been once more boosted by bitcoin. My funding thesis could be very bearish on the inventory round $200 just like my name when Sq. initially reached $100 again in September 2018 and fell over 65% within the subsequent 18 months.

Picture Supply: Sq. web site

One Desk Issues

The Q3 information headlines inform all of the story an investor must see. An organization simply would not randomly beat income estimates by 50% until the revenues are low calorie.

On this case, bitcoin falls into the acute low calorie class. My warning final quarter occurred when bitcoin revenues had been solely $875 million. This quarter, associated revenues almost doubled sequentially to $1.6 billion, up ~$1.5 billion from final Q2.

Supply: Sq. Q3’20 presentation

So, anyone paying consideration ought to understand that bitcoin income accounted for over 50% of Q3 revenues when the associated revenues had been lower than 10% final Q3. Why this issues is that bitcoin prices had been a really comparable $1.6 billion. The bitcoin enterprise solely generated ~$32 million in gross revenue. Anyone taking a look at gross margins would shun a inventory the place whole gross margins fell to solely 26% from 39% final Q2.

Even the core vendor GPV enterprise solely produced 9% development. Transaction-based revenues had been up roughly the identical as fee volumes. Certain, the true pleasure was across the Money App revenues. However right here once more, these numbers had been boosted by bitcoin buying and selling revenues.

When stripping out bitcoin, Q3 revenues had been $1.four billion versus $1.12 billion final 12 months. These internet revenues solely grew 25%. Even worse, bitcoin trades at multi-year highs. Sq. might see reported revenues collapse subsequent 12 months with any dip within the cryptocurrency.

Supply: Coindesk

Excessive Valuation

Sq. has 515 million shares excellent, putting the market valuation at an insane $103 billion. When stripping out the bitcoin buying and selling revenues, the cell funds firm solely generated $1.four billion in quarterly gross sales and simply $910 million within the adjusted income metric used previous to the SEC steerage requirement.

Exterior of those income numbers not jiving as a consequence of bitcoin, the underside line monetary metrics inform a a lot completely different story than the inflated income metrics. For Q3, Sq. solely generated a meager $37 million internet revenue.

Supply: Sq. Q3’20 presentation

The market will possible begin specializing in the adjusted EBITDA metric to worth Sq.. For Q3, the metric jumped to $181 million, up 38% from the $131 million stage final Q2.

Sure, the quantity was spectacular contemplating a number of the stress on the Vendor ecosystem. On the similar time, the Money App appeared to learn from the financial shutdowns as customers moved extra to on-line cash transfers. The large query exists on the place product demand will exist in a extra regular economic system and the market is already paying up for the inventory.

Even below a situation the place the annualized EBITDA is over $700 million, Sq. trades at almost 150x these targets. Once more, the fintech already has EBITDA margins of ~20% primarily based on the adjusted income determine. Bear in mind, that is the variety of revenues the place Sq. can derive a revenue contemplating each transaction and bitcoin associated prices are all cross by means of numbers regardless of how a lot gross sales the corporate generates.

The purpose is that Sq. already generates substantial EBITDA margins, offering much less upside sooner or later. This is not the story of an organization with meager margins the place EBITDA will develop 10 fold as gross sales double.


The important thing investor takeaway is that Sq. continues to commerce up primarily based on a number of the low calorie revenues from bitcoin. The fintech truly has a meager income base with substantial EBITDA margins already. Sq. would not warrant the present inflated inventory worth.

As well as, the cell funds firm faces the true situation the place bitcoin gross sales might fall subsequent 12 months. In such a situation, the inventory is very unlikely to carry the present valuations.

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Disclosure: I/now we have no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Further disclosure: The data contained herein is for informational functions solely. Nothing on this article ought to be taken as a solicitation to buy or promote securities. Earlier than shopping for or promoting any inventory you need to do your personal analysis and attain your personal conclusion or seek the advice of a monetary advisor. Investing contains dangers, together with lack of principal.

About Tom Greenly

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