Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Square Making Money?

Square Inc.’s (NYSE: SQ) payment solution is everywhere these days. I have seen Square devices at the hair stylist, in the locksmith’s truck, and even in the hands of hot-dog cart proprietors.

That raises the obvious question is Square making money?  After all, electronic payment of all sorts is expanding dramatically, and Square’s gadgets serve as a gateway to payment ecosystems.

Strangely enough, the answer is no, Square reported a loss of $-62.32 million. The loss shrank from $-78.54 million in June 2017, and -$204.71 million in September 2017, but it is still a loss.

Square might start making money and actually report an income next year if this trend continues. Yet the continuing loss, at a financial services company, still raises serious questions about Square’s viability as a standalone enterprise.

Square’s Growing Business

Square currently has a small; but impressive business, with two million sellers on November 26, 2017, 225,000 active invoice sellers on May 5, 2017, and availability in five countries, according to Expanded Ramblings.

Most importantly 50% of its invoices come from mobile devices, which is a huge opportunity in an age of new mobile-payment solutions such as Apple Pay Cash and Venmo. It is also seeking new opportunities such as Cryptocurrency; Business Insider reported Square was accepting some altcoin payments through its Cash App on 6 December 2017.

There is also hard evidence that Square’s business is growing in the form of continuous revenue expansion. Square’s revenues have grown for every quarter since ycharts began tracking in it in June 2015.

Square reported $1.039 billion revenues that grew to $1.44 billion in September 2015, $1.631 billion in September 2016, and $2.05 billion in September 2017. That means Square’s revenues grew by $1.011 billion during the nine quarters tracked by ycharts.

The potential for this business is certainly there, but is the cash and value there?

Does Square Make Money

There is a little evidence that can Square can make money in the ycharts data it reported a free cash flow of $33.98 million on September 30, 2017. That was down from $51.94 million in September 2016, and $39.22 million in June 2017.

Square is struggling to maintain cash flow despite reporting $130.21 million in cash from operations on September 30, 2017. That number was down from $146.26 million in cash from operations in June 2017, but a dramatic increase over $41.23 million in September 2016.

Square has the ability to dramatically increase the amount of cash flowing through the till but a hard time maintaining that cash from operations. The danger here is that cash flow is not steady, which makes it hard to generate float, or keep the money.

Square did make some money from cash from financing; $479.09 million on September 30, 2017. That indicates Square’s lending operations might be making money, but it also raises the possibility Square is borrowing to finance operations.

This explains why Square reported $868.37 million in cash and short-term investments on September 30, 2017. That number was a dramatic increase from $514.33 million in September 2016, but it is still low. It also explains the negative profit margin of -2.75% reported on September 30, 2017.

Therefore Square makes money sometimes; it is capable of making money, but not keeping it. That hardly qualifies as a value investment, despite the inherent value potential of the infrastructure that Square provides.

Square is not a Value Investment

All of this proves that Square is definitely not a value investment. That conclusion is strengthened by the assets which were just $2.084 billion on September 30, 2017.

Nor is Square a very good deal for investors it has not paid a dividend and punished investors with a -9.89% return on equity on September 30, 2017. Smart investors should stay away from Square unless they plan to short it. There are better long-term finance plays out there such as PayPal (NASDAQ: PYPL), and Discover (NYSE: DFS).

The most likely outcome for Square would be an acquisition because it would be cheap right now. Square had a market capitalization of $14.82 billion, a share price of $38.15 and an enterprise value of $14.37 billion on 8 December 2017.

Those numbers should make Square a tempting acquisition for financial service providers that want access to its small business customers. Likely buyers for Square include PayPal, Citi (NYSE: C), Discover, American Express (NYSE: AXP), Capital One (NYSE: COF), and banks such as Wells Fargo (NYSE: WFC).  

Dark horse acquirers for Square include China’s Ant Financial and Tencent Holdings; which are expanding their American footprints, and tech companies. Tech companies that might be interested in Square include Apple (NASDAQ: AAPL); which needs help expanding Apple Pay and Microsoft (NYSE: MSFT) which needs to expand its financial services exposure.

Square is just too tempting a target to remain independent. Some larger organization will gobble it up, in order to get access to those small business customers. Average investors should stay away from Square because it has not proven it can make money.