SQ: Square vs. Intuit: Which Stock is a Better Buy?

The financial technology industry is fast transforming the U.S. financial sector. In the past few years, fintech stocks have exploded in terms of growth with the evolution of digital payment-processing solutions. And the COVID-19 pandemic has further accelerated digitalization and led to a spike in online transactions. As a result, Square, Inc. (SQ) and Intuit Inc. (INTU), two leading players in the fintech industry, have been thriving.

Both stocks have generated significant returns over the past three years. While SQ returned 516% over this period, INTU gained 145%. In terms of year-to-date performance, SQ is a clear winner with 27.1% returns versus INTU’s 8.5%.

But which of these stocks is a better pick now? Let’s find out.

Business Structure and Latest Movements

SQ develops and provides payment and point-of-sale solutions in the United States and internationally. It provides Square Register, a point-of-sale (POS) system that manages digital receipts, inventory, and sales reports, as well as providing analytics and feedback. SQ is the fastest growing fintech company in terms of digital wallet usage in the U.S., and its popular Cash App had more that 30 million monthly transacting active customers in last June.

SQ recently launched “Square for Retail,” a new full POS system to help retailers reimagine their operations and better run their businesses. The service simplifies two aspects that retailers without a tailored POS find overly time-consuming and complicated: selling anywhere and managing their inventory. The company believes in cryptocurrency as an instrument of economic empowerment and has put more than $170 million into the most popular cryptocurrency, bitcoin. Combined with SQ’s previous purchase of $50 million in bitcoin, bitcoin investments represented approximately five percent of Square’s total cash, cash equivalents and marketable securities as of December 31, 2020.

INTU is a global technology company that markets financial management and compliance products and services to consumers, small businesses, self-employed, and accounting professionals in the United States and internationally. The company provides QuickBooks Payments service, a credit card processing option for merchant accounts included with the QuickBooks accounting software, which offers the tools and flexibility for online payments. INTU operates in three segments – Small Business & Self-Employed, Consumer, and Strategic Partner.

Earlier this month, INTU acquired Australia-based OneSaas to help it integrate third-party eCommerce solutions into its QuickBooks platform. The deal will allow INTU to use OneSaas technology for deeper data integration into its new QuickBooks Commerce solution, which is aimed at helping small businesses manage omnichannel sales. INTU helped eligible customers access more than $1.2 billion in SBA-approved and Paycheck Protection Program (PPP) loans last year. In accordance with the CARES Act, QuickBooks Capital is now accepting PPP applications for second-time loans from eligible QuickBooks customers.

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Recent Financial Results

In the fourth quarter, ended December 31, 2020, SQ’s revenue surged 141% year-over-year to $3.16 billion on the back of Bitcoin transactions over its Cash App ecosystem. SQ continued to focus on the impressive growth delivered by its Cash App ecosystem, which generated gross profits of $377 million, up 162% year-over-year. Its gross payment volume (GPV) rose 92% year-over-year to $32 million, with nearly 61% coming from larger sellers with volumes of at least $125,000 annually. However, its EPS came in at $0.59, declining 29% compared to its year-ago value of $0.83.

INTU’s revenue for its fiscal second quarter, ended January 31, 2021, declined 7% year-over-year to $1.58 million. However, its Online Services revenue increased 20%, driven by QuickBooks Online payments and QuickBooks Online payroll. In fact, its total international online revenue surged 44% year-over-year. But its EPS for the quarter came in at $0.07, declining significantly from the year-ago value of $0.91.

Past and Expected Financial Performance

SQ’s revenue and total assets grew at CAGRs of 76.6% and 57.3%, respectively, over the past three years.

The market expects SQ’s revenue to increase 373.8% in the current quarter (ended December 31, 2020), 300.3% in the next quarter and 37.1% current year. SQ’s EPS is expected to grow 4.3% in the current quarter and 1,100% next quarter but decline 6.3% in the current year. Moreover, its EPS is expected to grow at a rate of 39.6% per annum over the next five years.

In comparison, INTU’s revenue, EPS and total assets grew at CAGRs of 13.9%, 24.7% and 33.7%, respectively, over the past three years.

The market expects INTU’s revenue to increase 44.5% in the current quarter (ending April 30, 2021) and 16.2% in the current year. The company’s EPS is expected to decline 21.6% in the current quarter but rise 44.1% in the next quarter and 6.4% next year. Moreover, INTU’s EPS is expected to grow at a rate of 14% per annum over the next five years.

Profitability

While both SQ and INTU have generated almost the same level of revenues in the trailing twelve months, INTU is the more profitable, with a gross profit margin of 83.1% versus SQ’s 32.2%. Also, INTU’s ROE of 44.3% compares favorably with SQ’s 18.7%.

Valuation

In terms of trailing-12-month p/e, SQ is currently trading at 419.79x, 660% more expensive than INTU, which is currently trading at 55.25x. In addition, INTU is less expensive in terms of trailing-12-month p/s (13.73x versus 15.81x).

In terms of trailing-12-month price/cash flow also, SQ’s 387.32x is 782% higher than INTU’s 43.91x.

INTU looks much more affordable here.

POWR Ratings

While INTU has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system, SQ has an overall rating of D, which translates to a Sell.

INTU has a Quality Grade of A, reflecting the company’s strong fundamentals. In contrast, SQ has a grade of D, given its bleak outlook. In terms of Value Grade, INTU has a C, while SQ has a D grade, consistent with its relatively higher valuation multiples.

In the 105-stock Financial Services (Enterprise) industry, SQ is ranked #99. However, INTU is ranked #17 of 109 stocks in the Software – Application industry.

Beyond what I’ve stated above, our POWR Ratings system has also rated both SQ and INTU for Growth, Momentum, Stability, and Sentiment. Get all the SQ ratings here. Also, Click here to see the additional POWR Ratings for INTU.

The Winner

The key factors boosting the fintech market’s growth is high investments in technology-based solutions by banks and other financial institutions. In addition, infrastructure-based technology and APIs are reshaping the future of fintech. Hence, both SQ and INTU are good long-term investments considering their market dominance and strong prospects in the digital payment world. However, INTU appears to be a better buy based on the factors discussed here.

We think the rapid penetration of digital payments led to massive growth for INTU, and the stock is a viable option to bet on the immense growth potential of the fintech industry.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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SQ shares were trading at $236.37 per share on Wednesday afternoon, down $20.22 (-7.88%). Year-to-date, SQ has gained 8.61%, versus a 4.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...