Some thoughts on $SQ and its dramatic overvaluation. 1/

Square is around 60% payments revenue today. Post-IPO Square's payments business has struggled, generating weak margins and losing many key customers. Market valued it at 4x sales as a standalone entity. 2/

Since 2018, Square has pivoted to lending and Cash App. Lending appears to be the largest source of revenue growth, though Square doesn't break out its financials clearly. 3/

Lending would be a 2-3x sales business if they did a good job of it. Remember, $SQ is trading at 11x sales today.

Subscriptions (where lending and a few other businesses are counted) is now constitutes nearly half of Square's annual revenue growth. 4/

Square's lending quality is unclear - this is their first recession so we should see. $SQ bulls say the company offloads risk to third parties, however the exact amount is unclear.

Square says it sells "majority" of loans to third party. Is that 95%? 51%? 5/

Plus third parties can seemingly put back loans to Square if they are poorly underwritten. Since Square prides itself on extending loans in one business day or less, watch this space 6/

Cash App revenues, at least so far, are primarily in things such as Bitcoin and stock trading. These are low-margin businesses that draw great amounts of regulatory scrutiny.

$SCHW is worth 3x sales. $SQ's business here is worth less than that. 7/

Full business is obviously worth less than 11x when you're buying a struggling payments company grafted to a bank and a brokerage shop. Company should trade for something closer to 3-4x sales. 8/

As it transitions to banking (they got their banking license this March and will open Square Bank in 2021) valuation could go even lower. As lending grows to majority of revenues, $SQ could rerate to a bank and sell on a BV multiple.

Scary, as Square's book value is just $4. 9/

Could Square work out for longs? Sure, of course. But you're way overpaying for a "disruptive company."

Online banking - $AX - all-in-one-financial marketplaces $C circa 1999 - and online subprime lending "Slaas" are all tried concepts $LC. 10/

Consistent revenue growth doesn't necessarily equal success. Lendingclub has grown revenues nicely while its financials went off a cliff. It's not hard to buy growth lending money. 11/

$TWTR hack the other day raises some interesting questions for Dorsey's other company Square. Particularly with the crypto/Cash App stuff, data security is vital as there is no customer recourse if your Bitcoin is hacked. 12/fin

My 3,500 word thesis here if you want more: https://seekingalpha.com/article/4357722-warning-square-is-bank-not-tech-company