Why Square Looks Fairly Valued At $48

Square Inc. (NYSE: SQ) has seen impressive growth in recent years. The payments company’s revenue saw 30% growth and its stock price rallied by over 150% in 2017. The company’s continued efforts in attracting mid-to-large size sellers to its platform, its capability to launch new products that contribute significantly to its business, and its encouraging customer efforts with its Cash App, should continue to drive strong growth in 2018.

Our price estimate for Square’s stock stands at $48, which is slightly below the market price. We have also created an interactive dashboard which shows the forecast trends; you can modify the key value drivers to see how they impact the company’s revenues, bottom line and valuation.

Transaction Revenue To Remain The Major Driving Force

Square drives nearly 87% of its revenue from its Transactions business. The company generally charges a transaction fee of 2.75% to 3.50% on payments made through its platform. Square’s transaction revenue grew to $1.92 billion  (+32% y-o-y), backed by a 31% jump in its GPV (Gross Payment Volume). The strong growth in the company’s GPV was driven by medium and large sellers. These customers generated more than $125k in sales, contributing to an increase in the GPV mix to 47% in 2017 (+4% y-o-y).

More mid-to-large sized merchants are turning to Square because of the flexibility offered to integrate business systems with Square services and simpler ways to process transactions. One such service for Square is the point of sale (POS) system, which enables merchants to manage both offline and online sales through the same payment gateway, making it easier to track and manage performance. Given Square’s ability to attract more mid-to-large sized merchants to its platform, we expect this trend to continue through 2018.

Increased Demand For Services And Products To Drive Software And Data Products Revenue

Although Square’s Software and Data products revenue account for just 11% of overall revenue, they contributed about 21% of its gross profit. Revenue from this segment is mainly comprised of revenue from services offered through its lending, financial, and food services. This revenue grew 95% in 2017, the top contributors being food delivery service Caviar and lending platform Square Capital. One product that has recently taken off is its Cash App – a peer-to-peer payment app, which had more than 7 million active users in December.

The Cash App is forging a strong network, driven by Square’ ecosystem that stretches across buyers, sellers and employers, making the App valuable with every transaction. Each new service introduced by Square not only expands its ecosystem but also makes it stickier, making customers more deeply ingrained into its products and services. This could lead to a stickier revenue base, not to mention growth in customers.