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No. of Recommendations: 10
Thanks, everyone for your comments. For those of us who are long Square, the more important question is, what does the future hold? Why has the stock languished for the past 3 months while Paypal has gone up 20%?

In my original post, I made the case that companies with an Oomph factor greater than 2.0 are truly exceptional. (Oomph is the square of the YoY revenue growth, in multiplier form, multiplied by the gross margin.) SQ didn't look like it was in this exceptional league, using GAAP revenue and margin. But 2018 Adjusted Revenue, net of transaction costs, was only $1.6B, not $3.1B. This gives SQ an EV/S ratio of 18.7, which is right up there with the likes of TTD and AYX. Compare that to Paypal's EV/S ratio of 7.8, and there is a case to be made that the market thinks SQ is overvalued. Maybe that's why SQ has been flat for the past 3 months, digesting its gains.

But now let's look at Square's Oomph using it's Gross Profit as a percentage of its adjusted revenue. This is a harder number to calculate precisely. The Q4 Shareholder report shows a Gross Profit of $380M out of a reported adjusted revenue of $464M, which implies a gross margin of 81.9%. (This seems awfully high to me - would appreciate if someone could double check.)

Assuming that is, indeed, the correct adjusted gross margin, Square's Oomph shoots up to 2.2, and catapults it to 1st place in the list of exceptional companies that we analyzed. Here's that updated list below:


Gross YoY Sales
Symbol Margin Growth Oomph EV/S EV/S/Oomph
====== ====== ========= ===== ==== ==========
SQ 82% 64% 2.20 18.7 8.5
AYX 91% 55% 2.18 20.5 9.4
ZS 79% 65% 2.16 32.6 15.1
ESTC 74% 70% 2.15 24.4 11.3
MDB 74% 70% 2.13 28.5 13.4
SMAR 81% 58% 2.04 23.7 11.6
TTD 76% 56% 1.86 19.4 10.4
TWLO 53% 77% 1.66 25.2 15.1
OKTA 73% 50% 1.64 28.2 17.2


The EV/S/Oomph ratios have crept up a bit since my last post, but SQ now looks like the most attractive value of the bunch. It will be interesting to see what happens after they announce earnings next week Wednesday.

Good luck to all,
Ron
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