- Square hits all-time highs after low calorie revenues soar.
- Bitcoin now accounts for over 50% of sales while generating meager gross profits.
- The stock trades at ~150x annualized EBITDA.
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Despite warning investors on the bitcoin hype fueled results of Square (SQ), the market continues to pay up for the stock. Another big quarterly beat always helps fuel momentum, but the numbers were again boosted by bitcoin. My investment thesis is very bearish on the stock around $200 similar to my call when Square originally reached $100 back in September 2018 and fell over 65% in the next 18 months.
One Table Matters
The Q3 news headlines tell all the story an investor needs to see. A company just doesn’t randomly beat revenue estimates by 50% unless the revenues are low calorie.
In this case, bitcoin falls into the extreme low calorie category. My warning last quarter occurred when bitcoin revenues were only $875 million. This quarter, related revenues nearly doubled sequentially to $1.6 billion, up ~$1.5 billion from last Q2.
Source: Square Q3’20 presentation
So, anybody paying attention should realize that bitcoin revenue accounted for over 50% of Q3 revenues when the related revenues were less than 10% last Q3. Why this matters is that bitcoin costs were a very similar $1.6 billion. The bitcoin business only generated ~$32 million in gross profit. Anybody looking at gross margins would shun a stock where total gross margins fell to only 26% from 39% last Q2.
