SQ's 4Q beat was driven by much faster-than-expected cost reductions, underpinning a meaningful increase to 2024 guidance. With much of its cost rationalization already completed, SQ has shifted focus back towards building out a sustainable mid-teens gross profit growth algorithm, and is on track to achieve "Rule of 40" by 2026E. While we see risk around gross profit growth in the out-years, we believe the 2024 setup carries less execution risk around growth + margin improvement. We raise our estimates materially (>10%) and increase our target to $92 (from $84).
Broad-based 4Q beat. SQ’s 4Q23 EBITDA of $562M beat consensus of $448 by 25% driven by a combination of slightly faster gross profit growth and much lower-than-expected operating costs (faster-than-expected cost rationalization).
Updated 2024 guide surprises positively again. SQ has made rapid progress on right-sizing its cost structure and is already below the <12K headcount cap, with additional expense optimization work ongoing. This quick progress drove a meaningful increase to 2024 guidance: adjusted EBITDA now expected at $2.63B+ (+10% versus prior $2.4B), and adjusted operating income $1,150M+ (+31% versus prior $875M). SQ reiterated its intention for at least 15% gross profit growth in 2024, with Cash App growth expected to outpace Square.
Shifting focus back towards growth. With much of the cost rationalization in the rear-view mirror, SQ has shifted focus back towards building out a sustainable mid-teens gross profit growth trajectory (e.g., Cash App's primary focus on "banking its base", Square's focus on enhancements to the platform, go-to-market adjustments and scaling its banking products).
1Q24 guide implies double-digit adjusted operating margin. SQ expects 1Q24E: gross profit between $2.00-2.02B, adjusted EBITDA between $570-590M, and adjusted operating income between $225-245M. At the mid-point of the ranges this implies an 11% adjusted operating margin (up from 9% in 4Q23 and 5% in 3Q23).
Increasing out-year estimates materially due to slower expected expense growth. The adjusted EPS estimates are raised by +10% in 2024E (to $3.35 from $3.05), and +11% in 2025E (to $4.46 from $4.02) primarily due to lower-than-previously modeled operating costs.
Raising target. The $92 target price equates to ~20x our FY25 EPS estimate plus ~$3/share of excess cash. SQ’s earnings growth is at a material positive inflection point. We note our soft 2026E EPS would be ~$5.40-5.60/share, implying a target P/E multiple (ex. excess cash) ~16x.
SQ shares are rated to Outperform. It's believed 3Q23 was a turning point for SQ, with earnings/operating income growth at a material positive inflection, and we foresee durable gross profit growth across both Cash App and Square Seller over the medium term, in tandem with much greater operating efficiency.
The $92 target price equates to ~20x the FY25 EPS estimate plus ~$3/share value of excess cash. SQ’s earnings growth is at a material positive inflection point (best-in-class growth at scale). We note that the soft EPS estimate for 2026E would be in the region of ~$5.40-5.60/share, implying a target P/E (ex. excess cash) multiple ~16x.
The upside scenario imagines a 5x turn multiple re-rating on our 2025 EPS estimate.
The downside scenario imagines a 5x turn multiple de-rating on our 2025 EPS estimate.