The valuation of Square Inc (NYSE:SQ) makes no sense until you understand the business it’s in. Processors make very little money on each transaction, but they make up for it on volume. Best of all they get to hold the money for the hours or days they take to clear through banks.
This makes them a very good business. Square has added software and services aimed at the smallest businesses, accounting and even loans.
But its main advantages are that it’s easy for the smallest merchants to sign-up for, easy for them to use and understand, which also made it simple to build. It was among the first with readers that clipped to a smart phone and did business over cellular networks. But is SQ stock bordering on overbought?
Is SQ Stock Overvalued?
Square is the new kid on the processing block, having come to the public market in 2015 and having been founded just eight years ago, in 2009. This gives it a distinct advantage. It originally offered merchants just one deal, a discount of 2.75%, which made its processing job simpler.
To a casual observer, Square appears terribly overpriced. The company has never made money, its cash flow is miniscule. Its market cap of $6.6 billion represents more than three times last year’s sales of $1.7 billion.
But this is not out of line compared with peers: Vantiv Inc (NYSE:VNTV) is worth $12.84 billion on 2016 revenues of $3.578 billion. Visa Inc (NYSE:V), the industry’s dominant player, has a market cap of $211 billion on 2016 revenue of $15.082 billion. When Visa says jump, other processors ask how high.
Add the simplicity of Square’s back-end business model, along with the potential of its additional services, and it would seem investors are prepared to wait for a profit. The March quarter won’t be reported until May 3, and investors are expecting a loss of 6 cents per share on revenue of $448.51 million, compared with revenue of $379 million for the same quarter last year.
If Square is overpriced, in other words, then so is Visa, which has delivered 466% on investor money since coming to the market in 2008, along with regular dividends. And Visa is the Emma Watson of the current market — analysts can’t get enough of it.