Summary:
- The super-high valuation ratios of Square’s stock are thanks to its recent annual revenue growth rate of 170.72%.
- The 3-year revenue CAGR of SQ is 81.04%. Its estimated forward revenue CAGR is 111.31%.
- The $29 billion all-stock purchase of Afterpay will further accelerate the already-fast revenue growth rate of Square.
- Square’s average projected FY 2021 revenue is $19.05 billion. Afterpay’s FY 2021 revenue is A$925 million. This is substantially higher than Afterpay’s 2018 revenue of A$142.34 million.
- Afterpay’s core business is to make loans to people to buy things they could pay later in four installments. After charging fees to partner merchants.
The $29 billion all-stock acquisition of Afterpay is partly why Square’s (SQ) stock possesses super-high valuation ratios. The buy now, pay later via installments business model of Afterbay (could help sustain the high double-digit revenue CAGR of Square. SQ is now stuck with a forward GAAP P/E of 363.29 because a majority of investors are in love with its revenue CAGR of 170.82%. The 5-year average revenue CAGR of Square is only 59.89%. Going forward, investors are betting big that Afterpay could help Square achieve 100% revenue CAGR for the few years.
The very high revenue CAGR of Square is likely why we are super bullish on it. SQ has a buy signal because our AI algorithm gave it a 1-year forecast score of 462.07 and a predictability indicator of 0.51.
I Know First AI Algorithm issued a bullish forecast for SQ last November 19. SQ since that day has had a price return of +44.58%. I Know First, therefore, has a previous buy recommendation for SQ that proved to be very profitable.
A Market Darling Stock Because Of Its Hyper-Growth Performance
Investors still put growth as their no. 1 factor when evaluating the investment quality of stocks. As you can see below, Square has higher growth performance stats than PayPal (PYPL) and Intuit (INTU). Stripe, PayPal, Intuit, and even Apple (AAPL) are the top rivals of Square. The acquisition of Afterpay will help Square continue to grow faster than its digital payments peers.
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Growing faster than the competition is highly desirable. The global digital payments transactions last year amounted to $5.44 trillion. This particular industry’s CAGR is 11.21%. It will be worth $11.29 trillion by 2026. Square only processed digital payments worth $112 billion in 2020. The small market share of Square means it still has massive growth potential. Square’s latest quarterly gross payments (GM) volume is $33.1 billion. At the moment, Square’s high growth rate could help it catch up with its rivals Venmo (owned by PayPal) and Zelle.
We believe Square overpaid by doing a $29 billion all-stock deal to acquire Afterpay. The latest annual revenue of Afterpay is only A$925 million or $677 million. The super high-valuation ratios of Square enabled it to buy a fast-growing fintech rival like Afterpay at 42.83x Price/Sales valuation. This deal is actually more like a merger with Square taking full control of the partnership. Square did not want another rival in Afterpay.
The unique proposition from Afterpay is that it is the anti-credit card concept. Afterpay charges partner merchants a low-percentage cut for every purchase done through Afterpay’s installment payments system. What Afterpay is doing is letting people buy goods without needing a credit card. Afterpay users can pay in 4 equal installments without any interest. Afterpay will only charge late payment fees if its user cannot pay the installment on time. The late payment penalty is capped at 25% of the installment amount.
Afterpay basically offers short-term (6 weeks duration) loans to people who want to buy something.
Most employees in the world today get their bi-monthly salaries (15th and 30th of the month). The 6-weeks interest-free loan from Afterpay is therefore easily serviceable by anyone with regular income. Going forward, Square is now better equipped to compete against MasterCard (MA) and Visa (V). Afterpay’s digital loan concept lets people without credit cards (or cannot get a credit card due to bad credit rating) can still do traditional retail shopping and online purchases.
Financial Health
It is always prudent to check the financial health of high-growth companies. Square is growing fast without sacrificing its solvency. As per the chart below, Square has a total cash position of $5.6 billion. This is much higher than its short-term debt of $823.68 million. The $6.13 billion long-term debt is being serviced comfortably because Square’s net operating cash flow is still $831.25 million.
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The huge long-term debt says it is highly unlikely that Square will pay dividends within the next 10 years. Having $5.6 billion in total cash means management can defend SQ’s price from short sellers. Management could do share buybacks to protect SQ. The short interest on Square is somewhat high at 9.2%. This is the first risk you should consider when investing in Square. SQ has the attention of short-sellers. They are shorting SQ to the tune of $9.67 billion.
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SQ Stock Forecast: Conclusion
I hope you understood why I Know First has buy signals for Square. The self-learning algorithm of I Know First likes SQ’s very high average 5-year CAGR of 59.89%. The all-stock acquisition of Afterpay could add another $20 to $30 billion to Square’s annual GMV. Square’s annual GMV can reach $200 billion faster thanks to Afterpay.
My fearless forecast is that Square will likely raise the merchant fees and late payments fees that Afterpay charges to its customers. Afterpay is still a money-losing business until now. Going forward, raising Afterpay transaction fees could help improve the very low net income margin of Square. SQ’s very high revenue CAGR is impressive but it loses luster when you check its profitability stats. Square’s net income margin is just 3.6%.
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The emotions of investors are more important than the fundamentals of a company. The easiest technical indicator to determine the stock market’s general emotion is EMA. EMA analysis results in very bullish signals when the 5-day EMA is higher than the 13-day EMA, and the 13-day EMA is higher than the 20-day EMA. EMA gives weight to the short-term moving averages of a stock. As you can see below Square deserves a very bullish rating because its near-term EMA is higher than its trailing EMAs.
Past Success With SQ Stock Forecast
I Know First has been bullish on SQ’s shares in past forecasts. On our November 22, 2020 article, the I Know First algorithm issued a bullish SQ stock forecast. Despite that the prediction one-year horizon is not over yet, we can notice a significant current return of some 44.58% that an investor could have If he bought SQ’s stock according to the algorithm recommendation.
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