Image source: Rosenfeld Media via Flickr.
Payment processing newcomer Square (SQ +1.20%) may not look like a successful business at first glance, especially if you're just looking at the bottom-line numbers. In fact, Square has yet to post a profit. I'm pretty confident in saying that profits are coming soon, but it's important to look at the bigger picture.
Square's performance so far...
With less than a year as a publicly traded company under its belt, and just a few years in existence, the amount of information available about Square's history that we could potentially use to evaluate the business is a little lacking. However, here are some metrics we do know.
|
Year |
Total Revenue |
Net Income |
EPS |
|---|---|---|---|
|
2012 |
$203 |
($85.2) |
($0.71) |
|
2013 |
$552 |
($104) |
($0.82) |
|
2014 |
$850 |
($153) |
($1.08) |
|
2015 |
$1,267 |
($176) |
($1.24) |
|
2016 (estimated) |
$1,630-$1,670 |
($74) |
($0.60) |
Data source: S&P Capital IQ (2012-2015). Net income and revenue in millions. 2016 revenue estimate is Square's own guidance. 2016 net income and EPS projections are analysts' consensus.
So, the company has yet to generate a profit, and has posted some pretty big losses in its short history. It's important to keep in mind that losses like this are common for a young, rapidly growing company, but even so, losses are losses and prospective investors should be aware of them.
It's not about the losses -- it's about growth and opportunity
With a rapidly growing and innovative company like Square, the bottom-line numbers aren't exactly irrelevant, but certainly don't give a good picture of how the company is doing. Just look at Amazon.com -- to date, Amazon hasn't earned much of a profit, yet the company is doing phenomenally well by most other metrics.
In Square's case, take a look at some of the growth numbers. Adjusted revenue grew by 54% over the past year, and that's after 65% growth the year before. Payment processing volume has more than doubled over the past two years, and transaction profit margins are staying strong.
Image source: Square investor presentation.
Furthermore, Square has only begun to scratch the surface of its potential. The U.S. payment processing market is enormous -- about $10 trillion per year -- and Square's $50 billion in volume makes up just 0.5% of it. Not only that, but about 20 million U.S. businesses still don't accept credit cards, and Square's innovative payment solutions, simple pricing structure, and cheap hardware could help bring some of these businesses into the new economy.
Impressively, Square has grown its volume and revenue while chopping expenses at the same time, resulting in stronger margins and EBITDA.
Image source: Square investor presentation.
Finally, Square has been rolling out innovative new products to complement its payment solutions. For example, Square's revenue from software and data products has nearly tripled over the past 12 months, and its Square Capital business lending volume has grown by 123% over the past year.
Image source: Square investor presentation.
Be patient, profits are coming
The short answer to the question, "When will Square start making money?" is probably 2018. That's when most Wall Street analysts following the company project it to finally start producing positive earnings.
However, with a company as new, innovative, and rapidly growing as Square, if you're focusing on the bottom-line numbers at this stage of the game, you're missing the point. As long as the impressive growth continues and expenses are kept under control, profits will eventually take care of themselves. For now, just sit back and watch the company develop. I'm not a shareholder in Square yet, but it's definitely on my radar.
