Thursday, November 29, 2018

A 5-Factor Analysis of Square


Overview:

Square, Inc. engages in the provision of credit card payment processing solutions. The firm offers additional point-of-sale services, financial services, and marketing services. The company was founded by Jack Dorsey and Jim McKelvey in February 2009 and is headquartered in San Francisco, CA.

Number of Employees: 2,338
CEO: Jack Dorsey

Peer Group:

Stock Name (Symbol)Last PriceMarket Cap
CDW Corp.(CDW:XNAS)$87.8713.2596B
Cap Gemini SA(CAPMF:OOTC)$116.3719.5645B
Constellation Software Inc.(CNSWF:OOTC)$689.4014.6094B
Hexagon AB Unsponsored ADR Class B(HXGBY:OOTC)$48.8316.8305B
NTT DATA Corporation Unsponsored ADR(NTDTY:OOTC)$10.9915.4135B
Wipro Limited Sponsored ADR(WIT:XNYS)$5.0822.8726B
Workday, Inc. Class A(WDAY:XNYS)$135.2629.3514B
Vantiv, Inc. Class A(VNTV:XNYS) aka Worldpay (WP)$79.4923.9945B
ServiceNow, Inc.(NOW:XNYS)$160.6328.8018B
Shopify, Inc. Class A(SHOP:XNYS)$134.8114.4205B
Atlassian Corp. Plc Class A(TEAM:XNAS)$73.2017.2250B
Splunk Inc.(SPLK:XNAS)$92.5713.5718B
CGI Group Inc. Class A(GIB:XNYS)$62.5817.4416B
Square, Inc. Class A(SQ:XNYS)$63.4726.1733B

Analysis Methodology

The goal of this analysis is to determine if there is a viable investment strategy in the stock Square.
The analysis will begin by evaluating the price momentum of the market and industry using long, medium and short term measures.   We'll then follow with a peer-based analysis of Square using the following six factors:
  • Price Momentum
  • Quality
  • Growth
  • Income
  • Value
  • Profitability.
Each factor uses several metrics each providing different insight.  For example, the profitability factor looks at gross profit to assets, net profit margin, the 5 year average on the pretax return on assets, the 3 year average ROE, net operating income margin and the free cash flow yield. 

The company with the best metric value is given a score of 14 (as there are 14 companies in the group we are looking at), the second best a 13, and so on.  The ranking process is repeated for each metric and then all of the scores for the particular factor are summed.  The grand total is then re-ranked and the best company for the particular factor becomes apparent.

INVRS lets you analyze a company in any way you wish.  It's an extremely robust and flexible platform allowing you to easily accomplish two of the most difficult, yet profitable investment tasks: create investment models and perform peer based analysis.

Date: This analysis was performed on Sunday, November 25, 2018 and uses the closing prices from the 23rd.

Market and Sector Price Momentum Analysis

Let's start with an overview of the market and sector.  Let's look at a  year price graph and then review momentum.



Longer Term -
% Price Change over Two Years
Medium Term -
12 Month Less 1 Month Price Change
Short Term -
Price Less 3 Month Moving Average
Market (S&P 500)20 % - bullish2% - weakly bullish-7% - bearish
Sector (S&P Information Tech)41% - bullish10% - bullish-13% - bearish

Both the market and the sector are showing a similar pattern - positive price momentum in the long-term category, becoming weaker over the medium term and turning negative in the short term.  This trend is not favourable to a long position in the near term and a short could be premature.

Price Momentum for SQ and the Group



Long Term -
% Price Change over Two Years
/Rank
Medium Term -
12 Month Less 1 Month Price Change
/ Rank
Short Term -
Price Less 3 Month Moving Average
/ Rank
SumFinal Rank
SQ340% / 1487% /14-20% /12910
SHOP224% /1333% / 11-7% / 83213
TEAM170% / 1263% / 13-9% / 63112
NOW93% / 1147% / 12-11% / 4279
CDW71% /1029% / 92% / 143314
SPLK61% / 925% / 8-11% / 5227
WDAY60% / 829% / 100% / 123011
CAPMF48% / 75% / 3-3% / 9195
CNSWF48% / 618% / 6-1% / 11238
HXGBY     44% / 5                                                                       -2% / 2                                                                                              -7% / 7                                                                                       14         3                            
VNTV/WP41% / 422% / 7-15% / 3144
GIB32% / 317% / 50% / 13216
WIT-47% / 2-4% / 1-1% / 10132
NTDTY-57% / 19% / 4-17% / 271

From a purely ranking perspective, CDW has the best price momentum.  SQ is fifth.  However, we're seeing the same pattern we saw with the market and industry: long & medium term positive momentum turning negative in the short term.  We're also seeing that the company with the greatest positive long & medium term momentum also has the greatest negative short term momentum, which happens to be SQ.

Quality 

We'll look at five metrics for the factor of quality:
  1. Earning volatility (as measured by the standard deviation of six years of earnings)
  2. Gross margin (gross profit divided by sales)
  3. Net margin (net profit divided by sales)
  4. Total asset turnover (sales divided by total assets)
  5. Financial leverage (debt as a percentage of total capital)


SD of Earnings / RankGross Margin / RankNet Margin / RankSales/Assets / RankFinancial Leverage / RankSumFinal Rank
CDW1.1 / 3.2 / 20 / 82.2 / 14.8 / 2295
CAPMF1.9 / 2.3 / 4.1 / 10.7 / 9.3 / 9348
CNSWF2.4 /1.3 / 5.1 / 111.1 / 13.4 / 7379
HXGBY.8 / 7.6 / 10.2 / 14.4 / 2.3 / 84111
NTDTY.2 / 11.2 / 30 / 7.9 / 10.4 / 6379
WIT.1 / 14.3 / 6.1 / 13.7 / 8.2 / 115214
WDAY.4 / 8.7 / 11-.1 / 2.4 / 3.5 / 4284
VNTV/WP.3 / 10.4 / 80 / 9.5 / 4.9 / 1327
NOW                .8 / 6                             .7 / 12                        -.1 / 4                       .6 / 5                          .7 / 3                                    30   6               
SHOP.2 / 13.6 / 9-.1 / 5.6 / 60 / 134613
TEAM.2 / 12.8 / 13-.1 / 3.4 / 1.5 / 5348
SPLK.9 / 4.8 / 14-.2 / 1.6 / 70 / 144010
GIB.8 / 5.1 / 1.1 / 121.0 / 11.2 / 124111
SQ.4 / 9.4 / 70 / 61.0 / 12.3 / 104412

Note: there were a couple of tied values in this factor, which is why it ranges from 14 to 4.
The highest quality stock is WIT,  SQ was the third highest.

Growth

There are five metrics for the factor growth:
  1. Total revenue change over 1 year
  2. EBITDA change over 1 year
  3. Free cash flow change over 1 year
  4. Gross margin change over 1 year
  5. Number of year over year growth in earnings.


Total revenue / RankEBTIDA / RankFCF / RankGM / Rank# of Year of
Growth / Rank
SumFinal Rank
CDW9% / 529% / 829% / 9-3% / 15 / 14378
CAPMF4% / 26% / 53% / 4-1% / 53 / 9254
CNSWF17% / 725% / 713% / 61% / 75 / 14419
HXGBY12% / 612% / 621% / 73% / 104 / 134210
NTDTY19% / 85% / 4-24% / 2-2% / 32 / 6233
WIT3% / 1-1% / 3-12% / 31% / 83 / 11265
WDAY37% / 1130% / 941% / 102% / 92 / 74612
VNTV/WP12% / 6-4% / 222% / 8-2% / 43 / 10306
NOW            39% / 12                              118% / 12             806% / 13 4% / 12          1 / 4                          53     13                    
SHOP73 % / 14-11% / 1-24% / 16% / 130 / 2317
TEAM41 % / 131,768% / 1453% / 11-3% / 21 / 34311
SPLK34% / 1032% / 1055% / 120% / 61 / 54311
GIB9% / 4114% / 1111% / 53% / 114 / 124311
SQ30% / 9161% / 134,514% / 1414% / 142 / 85814
*Dividing by a negative gives a nonsense result, however one can attempt to make sense of the number by making assumptions.  In this case, our assumption is if the numerator is positive and the denominator is negative, we convert the denominator into a positive number.   If both are negative, but the numerator is less than the denominator, we convert the quotient into a negative number
SQ has the highest growth rate.

Income

Although some of these companies in this peer group offer a dividend, SQ does not, so we won't look at this factor.

Value

We'll look at five value factors:
  1. Enterprise value over EBITDA
  2. Price to book
  3. Price to earnings
  4. Price to sales
  5. Theoretical price (as calculated using the Ohlson Clean Surplus (OCS), for more information on the valuation tool, please review this article) over current price.
Here are the results:


EV/EBITDA / RankP/B / RankP/E / RankP/S / RankP/TPSumFinal Rank
CDW13 / 914 / 827 /41 / 14.6 / 144911
CAPMF11 / 1012 / 1021 / 61 / 121.4 / 104810
CNSWF18 / 524 / 466 / 25 / 72.8 / 8268
HXGBY17 / 63 / 1223 / 55 / 8.9 / 11429
NTDTY6 /112 / 1429 / 31 / 131.4 / 95012
WIT14 / 73 / 1319 / 83 / 10.9 / 125012
WDAY*18 / 6*12 / 340.8 / 3122
VNTV/WP21 / 424 / 399 / 13 / 93.6 / 7247
NOW1,742 / 148 / 1*12 / 4164.1 /171
SHOP            *                          13 / 9             *            14 / 2             6.3 / 6      17     6                       
TEAM527 / 219 / 5*17 / 123.9 / 4123
SPLK*16 / 7*10 / 5108.8 / 2144
GIB13 / 83 / 1120 / 72 / 11.8 /135012
SQ252 / 332/ 2*6 / 614.3 / 5165

* negative denominator, nonsensical value.

SQ is showing poor value, the fifth lowest score.

Profitability

There are six profitability factors:
  1. Gross profits to assets
  2. Net profit margin
  3. 5 year average pretax return on assets
  4. 3 year average ROE
  5. Net operating income margin
  6. Free cash flow yield
 Here are the results:


GP TO ASSETS / RANKNET PROFIT MARGIN5 YEAR AVG PRETAX
RETURN ON ASSETS
3 YEAR AVG
ROE
NET OPERATING
INCOME MARGIN
FREE CASH
FLOW YIELD
SUMFINAL
RANK
CDW.35 / 113% / 88% / 1044% / 136% / 74% / 9589
CAPMF.19 / 26% / 106% / 914% / 911% / 95% / 11506
CNSWF.30 / 8 9% / 1112% / 1351% / 1418% / 133% / 76612
HXGBF.23 / 620% / 148% / 1114% / 8 22% / 144% / 86111
NTDTY.23 / 53% / 716% / 148% / 76% / 87% / 14558
WIT.21 / 415% / 134% / 717% / 1215% / 124% / 10589
WDAY.31 / 9-15% / 2-9% / 5-26% / 4-14% / 21% / 3251
VNTV.21 / 35% / 96% / 816% / 1013% / 105% / 12527
NOW.42 / 13-8% / 4-11% / 3-62% / 2-5% / 52% / 5325
SHOP .34 / 10                            -6% / 5                            -10% / 4                      -9% / 5          -7% / 3                     0% / 1           28   3         
TEAM.27 / 7-14% / 30% / 6-6% / 6-6% / 42% / 4304
SPLK.5 / 14-20% / 1-15% / 2-36% / 3-20% / 12% / 6272
GIB.13 / 110% / 1212% / 1217% / 1113% / 116% / 136010
SQ.37 / 12-3% / 6-19% / 166% / 11% / 60% / 2283

SQ profitability showing is poor at 3.

Summary


SQ's standout characteristic is its growth rate.  Out of a group of 14 peers, it achieved the highest combined score for growth as well as had the highest individual scores for free cash flow and gross margin.  It was also strong in quality, with the third highest position.  The bear story is that it's expensive and it doesn't have strong profitability.  Furthermore the price momentum for the stock, sector and the market appears to be at an inflection point -  possible changing from direction from upward to down.

My opinion is there is a lot of risk with a position in the stock at this time. I would remain on the sidelines until a clearer story emerges.

Disclaimer

Part of intelligent investing involves taking on risk levels appropriate to one's circumstances.  We don't know what your's are and this analysis should not be construed as investment advice.  INVRS, its parent company, its officers, directors and employees cannot be held responsible for any investment decisions you make.

Saturday, November 24, 2018

Alibaba - The Time Isn't Now

The Magic is Real...except for price momentum.


Overview:

Alibaba Group Holding Ltd. provides online and mobile marketplaces in retail and wholesale trade. It operates through the following segments: Core Commerce; Cloud Computing; Digital Media and Entertainment; and Innovation Initiatives and Others. The Core Commerce segment comprises of platforms operating in retail and wholesale. The Cloud Computing segment consists of Alibaba Cloud, which offers elastic computing, database, storage and content delivery network, large scale computing, security, management and application, big data analytics, a machine learning platform, and other services provide for enterprises of different sizes across various industries. The Digital Media and Entertainment segment relates to the Youko Tudou and UC Browser business. The Innovation Initiatives and Others segment includes businesses such as AutoNavi, DingTalk, Tmall Genie, and others. The company was founded by Chung Tsai and Yun Ma on June 28, 1999 and is headquartered in Hangzhou, China.

Number of Employees: 66,421
CEO: Yong Zhang

Peer Group:

Stock Name (Symbol)Last PriceMarket Cap
eBay Inc(EBAY:XNAS)$28.4427.3877B
Amazon.com, Inc.(AMZN:XNAS)$1502.06734.5073B
JD.com, Inc. Sponsored ADR Class A(JD:XNAS)$19.2723.2008B
Alibaba Group Holding Ltd. Sponsored ADR(BABA:XNYS)$150.33386.6382B

Analysis Methodology

This is a peer-based analysis that will examine six factors in order to determine the merits of an investment in BABA:
  • Price Momentum
  • Quality
  • Growth
  • Income
  • Value
  • Profitability.
Each factor uses several metrics each providing different insight.  For example, the profitability factor looks at gross profit to assets, net profit margin, the 5 year average on the pretax return on assets, the 3 year average ROE, net operating income margin and the free cash flow yield. 

The company with the best metric value is given a score of 4 (as there are four companies in the group we are looking at), the second best a 3, the second worst a 2 and the worst a 1.  The ranking process is repeated for each metric and then all of the scores for the particular factor are summed.  The grand total is then re-ranked and the best company for the particular factor becomes apparent.
INVRS allows the user to analyze a company in any way they wish.  The analysis could be on any factor.  The metrics can be any metric.  Or you can create your own models that fall out of the factor-based purview.

Price Momentum

This factor has short to medium term utility.   The concept is that stocks will tend to trade in the momentum established, until the don't.  Some investors with a longer term horizon might not be interested in this, but we will run it regardless.   We'll use a negative scale to indicate companies with negative price momentum.

The metrics we're looking at are:
  • The percentage price change over two years,
  • The M-12 less M-1 percentage price change (or in other words, the price change over the past 12 months excluding the most recent month),
  • Price change relative to the 10 week moving average.
The results:


% change over
2 years
Rank12 months less 1
month price change
RankPrice change relative to the
10 week moving average
RankSumFinal
Rank
EBAY1%2-16%3-10%27-1
AMZN112%436%4-12%191
JD-14%1-37%1-5%35-2
BABA64%3-20%21%491

AMZN & BABA are the only two showing some positive price momentum, but both have two negative components.

EBAY and JD are showing negative price momentum, in my opinion JD more so.

Quality

We'll look at six metrics for the factor of quality:
  1. Earning volatility (as measured by the standard deviation of six years of earnings)
  2. Gross margin (gross profit divided by sales)
  3. Net margin (net profit divided by sales)
  4. Total asset turnover (sales divided by total assets)
  5. Financial leverage (debt as a percentage of total capital)
  6. Operating leverage (fixed assets as a percentage of total assets).


Metric 1/RankMetric 2/RankMetric 3/RankMetric 4/RankMetric 5/RankMetric 6/RankSumFinal
Rank
EBAY2.14/276%/4-11%/1.37/255%/2320%/2132
AMZN2.37/137%/22%/31.35/361%/111%/3132
JD.51/414%/10%/21.90/431%/30%/4184
BABA1.42/357%/325%/4.33/122%/41094%/1163

JD came out with the highest quality score, followed by BABA.*

Growth

We'll look at five metrics for growth:
  1. Total revenue change over 1 year
  2. EBITDA change over 1 year
  3. Free cash flow change over 1 year
  4. Gross margin change over 1 year
  5. Number of year over year growth in earnings.


Metric 1/RankMetric 2/RankMetric 3/RankMetric 4/RankMetric 5/RankSumFinal
Rank
EBAY7%/1-2%/113%/2-1%/23/182
AMZN31%/222%/2-33%/16%/44/3123
JD37%/352%/3179%/44%/34/2154
BABA61%/477%/455%/3-8%/14/3154

BABA and JD tied for this metric for the best growth stocks.**

Income

None of the companies under consideration offer a dividend.

Value

We'll look at five value factors:
  1. Enterprise value over EBITDA
  2. Price to book
  3. Price to earnings
  4. Price to sales
  5. Theoretical price (as calculated using the Ohlson Clean Surplus (OCS), for more information on the valuation tool, please review this article) over current price.***
Here are the results:


Metric 1/Rank
(avg 51.26)
Metric 2/Rank
(avg 10.09)
Metric 3/Rank
(avg 142)
Metric 4/Rank
(avg 5.3)
Metric 5/Rank
(avg 3.5)
SumFinal Rank
EBAY15.07/43.57/4Negative4.19/25.6/1112
AMZN38.57/226.42/1245.9/13.24/35.5/291
JD117.19/13.77/3Negative1.1/41.8/3112
BABA34.20/36.61/239.54/212.69/11/4123

BABA came in with the highest score for value, but be aware that we are dealing with some pretty high valuations, specifically a PE ratio of 40.  However according to the OCS, BABA is currently fairly valued, something I haven't seen in a while with tech stocks.

Profitability

We'll look at six profitability factors:
  1. Gross profits to assets
  2. Net profit margin
  3. 5 year average pretax return on assets
  4. 3 year average ROE
  5. Net operating income margin
  6. Free cash flow yield
 Here are the results:


Metric 1/RankMetric 2/RankMetric 3/RankMetric 4/RankMetric 5/RankMetric 6/RankSumFinal
Rank
EBAY.28/3-11%/110%/330%/424%/38%/3173
AMZN.50/42%/32%/211%/22%/21%/1142
JD.27/20%/2-3%/1-12%/10%/110%/4111
BABA.19/125%/417%/425%/328%/44%/2184

BABA comes out number one in terms of profitability.

Summary of Results

From a quality perspective, BABA is a close second after JD.  It's tied for growth for the top position with JD and it holds the top position for value and profitability.  It therefore could be a candidate for a long position.  However, it appears that we are at an inflection point with respect to price momentum.  If it was me considering a long position, I would wait until a new price trend established itself - going long when it became clearly positive.

Sign up for a free trial with INVRS and keep an eye on the price momentum.

Analysis Notes

*In EBAY's calculation for operational leverage I had to use one previous year value as the current year wasn't available.
**I gave JD a lower rank than BABA for the fifth metric, even though they had the same number of year over year instances of growth.  This was a judgement call on my part to reflect the fact that JD's earnings have been negative every single year, whereas BABA's have been positive every year.
***Assumptions used: The near term market return will be -7%, ROE and the dividend payout ratio will remain unchanged, no growth factor included.

Disclaimer

Part of intelligent investing involves taking on risk levels appropriate to one's circumstances.  We don't know what your's are and this analysis should not be construed as investment advice.  INVRS, its parent company, its officers, directors and employees cannot be held responsible for any investment decisions you make.