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Should You Buy Square After Its 1,986.6% Stock

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have, the more capital you keep. And the more capital you keep, the faster you compound your money.

To help you find the best potential investments for your retirement portfolio, today I answer Should You Buy Square After Its 1,986.6% Stock Rise?

Square Inc (SQ) provides payment and payment acquisition services to businesses and vendors with its app.  And it recently started CashApp which is a person-to-person payment network like Venmo. 

Founded in 2009, Square’s seen amazing growth as it took advantage of the power of smartphones to rocket past other payment and merchant networks.

It’s been so successful that from its November 19th, 2015 IPO at $9 per share its grown 1,986.6% to $251.23 per share as of this writing.

But is it a good buy today?

Let’s find out.

It’s based in San Francisco California.  It has a $114.9 billion market cap. And its seen rapid growth since 2012…

Square’s Revenue Jumped 4,580% Since 2012

Above I told you about the rapid growth in its share price… The massive increase in its revenue since 2012 is the main reason why.

In 2012 Square produced $203 million in revenue… In the last 12 months it produced $9.5 billion in revenue.

This is an 4,580% increase since 2012… And an average annual growth of 508.9% over the last 9 years.

Above I told you it took advantage of the smartphone trend with its app and attachments to allow people to pay anywhere… That was a massive understatement.

This kind of revenue growth is extraordinary… Even for a high growth stock like Square.

And this is the main reasons its stock skyrocketed since its IPO.

One thing it hasn’t led to yet though is huge profits.

Square Is Unprofitable

Over the last nine years it earned an average operating income margin of negative 11.7% per year.

I look for anything above 10% so this is not good.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its negative 4.6% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

Square falls short of both which isn’t great… But it’s also not the full story.

Fast growth stocks like this often don’t have huge profits and cash flows because they’re busy plowing all that money back into growing the business.

This is what Square’s done in the last 9 years… And it’s paying off massively as you saw above with the enormous growth in its revenue.

And its also paying off in terms of profits and cash flows too.

During the early part of the last 9 years Square was hugely unprofitable on both important metrics.

That’s no longer the case.

In the last year, its operating profit margin was only negative 0.2%.  And it was profitable on an FCF/Sales margin with a ratio of positive 2.6%.

Not only is Square’s growth paying off in terms of a skyrocketing share price led by revenue… But its now becoming a profitable company as well.

This is important because over the long term, companies are valued based on the profits and cash flows they produce… Not revenue.

However, it still doesn’t meet my minimum thresholds for an investment.

Yet.

Because of these increased profits its also got low debt levels too.

Square Has Low Debt

As of this writing Square has $5.89 billion in cash compared to $3.49 billion in debt.

As a percentage of its balance sheet, total liabilities make up 72.8%.

Debt makes up only 3% of its market cap.

And its debt-to-equity ratio is 1.11.

These are all below the normal thresholds I look for in an investment, except for the debt-to-equity ratio… But that’s not bad either.

For example, I look for anything below 1 on the debt-to-equity ratio. These numbers being below – or close – to the thresholds I look for add a big margin of safety to potentially owning Square stock.

But is it cheap enough to buy?

Square IS NOT Cheap

With the markets at or near all-time highs you’d expect a fast growth stock like Square to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 571.

Its P/CF is 317.4.

Its forward P/E is 200.

And its enterprise value to operating income – EV/EBIT is 409.7.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

This means, Square is overvalued by a massive amount now.  It’s so overvalued, it’s one of the most overvalued stocks I’ve shown you on this site.

And this means owning its stock does not offer you enough margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Square being massively overvalued, buying its stock today is enormously risky… And because of this you should also expect lower returns owning it going forward.

Conclusion

If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – do not invest in Square due to its enormous overvaluation.

Instead, consider investing in one of the following stocks that I talked about in recent articles.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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