Square is a very hot company right now, within my favorite sector, FinTech. However, it has had an extreme year, and so, many people are considering jumping the wagon. I got in "late" @32.6, after my interest got peaked and I built a model using Discounted net present value evaluation. If anyone is interested, I could provide the entire model, however, here are the highlights.
Square handles payment systems for small business, providing tons of service for low fees, that are easy to implement for businesses. They are building an ecosystem, where a company elects to use their business and gets everything they need on the fintech side of every business.
Revenue & Prospects The average year to year revenue gain for the last quarters has been 28%, which has been very steady as the company figures out its new position in the market. Its advances within loans and general banking expands their market share of the fintech market into loans, banking and even business assistance as they can provide EVERYTHING a small business might need.
The Square application is within the top at both IOS (iphone) and Google play (android). It´s by far the most accessable service among competitors, giving great growth, which is shown in the numbers.
Model numbers Transaction revenue is up on average 30% year to year each quarter in 2017, while their subscription revenue y/Y is up around 70% consistently each quarter. Their hardware is struggling, however it is a fraction of the transactions which is the largest by far.
In Q1 2016, Hardware revenue was over twice as large as subscription, however today the subscription is twice as large as the hardware. This show incredible growth of average 70% in the area where they make the most money.
Transaction margins is around 31% consistently, while hardware is usually at a 40% loss. However, their BY FAR fastest growing cashflow stream of subscriptions hold an incredibly strong margin of 70%. Surreal growth in high margin business is one of the most attractive things for a business to have.
Prediction (discounted cashflow analysis) If we assume that the current y/y revenue growth to be maintained throughout 2018, to then drop off from 30% to 20% in 2019 and maintain that to 2022 (which is in my opinion very conservative), to then drop off 14% growth in revenue (lower than many tech companies today) all the way to 2031, we get a conservative perhaps but realistic revenue prediction.
We assume that cost of goods sold are maintained, their margined neither improved or worsened, as this is hard to predict. It comes down to management, which for the record I belive will do greatly.
We assume that r&d and overall operating expense increases along with revenue, along with a taxation of 25% once full steady profitability is achived, along with a long term maturity of -2% over a long time, and a discount rate at 7%.
The discount rate is decided based on the risk of failure, and 7% is quite high. The company is relatively small, and the risk follows.
Finale: This all gives a final net present value of 19 259 036 000, after the net present value have cash and debt added into it. This puts the value of the stock to 50,16 USD, which gives 28% upside to its current price of 40.
I am bullish, and while the gain of 28% is not risk free, this shows that the stock is not yet over valued, as the cashflow and balance sheet supports the inflated price. At this point it's probably not a scream purchase, but the management is fantastic, and the company is worth more than its valued at currently.
My portfolio was 6% SQ previosuly, and after this evaluation it is increased to 20% of the portfolio. I am aware of the risk, and I warn of that risk. However, SQ wont suddently drop, as the finances support the price. IT MIGHT correct, which is impossible to predict, as the price has increased fast.
Note. My personal evaluation is that growth derivative will still increase, and it will grow faster than my projection. My personal evaluation is 50.16 conservativly, but my price target is at 55
Submitted November 17, 2017 at 05:23AM by lykosen11 http://ift.tt/2zP9yFu
No comments:
Post a Comment