Square Inc (NYSE: SQ) Valuation Report – 5Th July 2020

(Michael Li, Olivia Pote)

Closing Price: $113.39

Year Range: $32.33 – $ 118.78

Market Cap: $49.8180 Billion

Rating: Buy – Long Term Upside Potential

Square’s business model which shows efficient client recruiting, flat fees and internally developed software solutions allows for the firm to reach and retain micro merchants. In the first quarter of 2020, Square maintained solid growth due to only a partial impact from COVID-19. However, from April onwards company disclosures suggest a significant short-term downside due to the nature of square’s micro merchant client which puts the company in a difficult financial position, as the nationwide economic downside from the coronavirus has disproportionately affected smaller businesses which make up a large part of square’s client base.

Looking at the long-term potential of Square, the trend of former financial metrics previous to the impact of the coronavirus suggest a trend for long term potential for growth.

Discounting recent disclosures affected by the coronavirus, all three indicators above show positive YoY growth rates with Net Income rising from a loss of $38M in the Q1 2019 to $391M.

The COVID-19 pandemic has accelerated the adoption of Cash App as people used it to receive stimulus payments more quickly or to donate to those in need. Moreover, Cash App is increasingly being used as people’s primary bank account instead of just a peer-to-peer transfer platform, with the volume of direct deposits tripling from March to April. Nonetheless, the pandemic has also brought tailwinds to the seller ecosystem portion of Square’s business, as temporary closures has led to a significant reduction in gross payment volumes of $2.9B in Q1 2020 vs Q4 2019. However, continuous innovation has enabled Square to survive the impact of COVID-19 as seen by the launch of “curb side pickup and local delivery” resulting in a more than fivefold increase in weekly gross payment volumes. (See Fig. 1)

Square has demonstrated its ability to rapidly adapt and roll out new features with the launch of Online checkout in May, which enables retailers to accept e-payments without setting up an online store, and on-demand delivery in June by partnering with local delivery partners such as Postmates. Therefore, although lockdown measures have and will likely continue to impact revenue from its seller ecosystem business, the agility Square has demonstrated in introducing new features that capitalize on the acceleration of e-commerce in addition to the strong growth of Cash App suggests upside potential in the long-term.

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