Square Inc (NYSE:SQ) became the hottest company in payment processing by catering to the needs of ultra-small businesses, with cellphone-based terminals, simple pricing, and easy-to-read reports. SQ stock has more than quadrupled in price in the last two years.
Now the company seems to be doubling down on that niche by buying Weebly, a website developer founded a decade ago and a neighbor based just two miles away.
Weebly, which competes in a crowded space alongside such companies as Wix.Com Ltd (NASDAQ:WIX), Squarespace and Automattic, the commercial side of WordPress, already includes commerce capabilities in its products and services, so it’s a natural fit.
Square Getting Pricey
Weebly has 625,000 subscribers to its web site services, 40% of whom are outside the U.S., and Square is paying a mix of cash and stock for the company. The idea is that Square will marry its financial services, which include lending, with Weebly’s design and marketing tools. The deal is also supposed to help Square grow beyond American shores.
Early reviews from investors were raves. Square’s value is up 140% in the last year, but the stock is starting to get pricey. Its December quarter sales were $616 million, up 36% year over year, and analysts are expecting $624 million in revenue when it reports May 2.
Square had revenues of $2.2 billion for the last fiscal year, so investors are now paying 9 times revenue with a market cap of $18.1 billion. We won’t talk about price to earnings ratios. Square lost 17 cents per share last year.
As a processor, however, the numbers are not out of line. Visa Inc (NYSE:V) had revenues of nearly $18.4 billion last year, but its market cap is $271.2 billion, meaning investors are paying 15x revenue. The difference is that Visa had $6.7 billion of net income and pays a quarterly dividend of 21 cents per share.
The question is whether Weebly is worth the premium. Most of its competitors are relatively small. The closest analog I could come up with, DNS and domain host Godaddy Inc (NYSE:GDDY), has a market cap of $10.9 billion on trailing year revenue of $2.23 billion.
Square has superior growth to either Visa or GoDaddy, but its lack of profit means it must keep up the growth pace for the stock price to remain where it is.
Weebly’s international presence could be a red flag, however, as should the fact that while it claims 45 million users, the vast majority of whom are on a free tier.
It’s a profile that may remind some of Shopify Inc (NYSE:SHOP), which short-seller Citron accused of being a pyramid scheme last fall. Since that accusation was made, however, Shopify reported annual revenues that were twice those of 2016, and the shares recently hit a new all-time high.
Subscriptions Will Fuel SQ Stock
What the Weebly deal tells investors is that Square is looking increasingly to subscriptions, not just transaction revenue, for the growth it needs to keep the SQ stock price rising.
In addition to Weebly, Square has also bought Zesty, a catering company it will plug into Caviar, a corporate catering company it already owns. Zesty, like Weebly, got its start with the Y Combinator incubator.
Properly valuing Square, with these non-payment deals in place, is going to become a tricky business. Square is banking on investors not knowing the difference between a food bill, a website subscription, and a payment fee. If the market falls, those questions will be asked.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.