Brett's December Portfolio Update
A new stock added to the portfolio
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Brett here.
I hope everyone had a fantastic new year. This month for the update I am going to talk about Square (ticker: SQ), the financial services company founded by Jack Dorsey.
Square launched in 2009 with a white credit card reader that could process payments with a mobile device (called mobile point of sale, or POS). Since then, they’ve expanded to different payment verticals for small and medium-sized businesses (SMBs) and launched a consumer personal finance app called the Cash App.
As of the end of 2019 Square has two main businesses: merchant and consumer. The business ecosystem is more mature, at around 10 years old, and has higher EBITDA margins (estimated to be around 30%). Besides POS, they offer small business loans, credit and debit cards for merchants, online stores, and back-office software. On the consumer front, the Cash App offers P2P payments, the ability to buy Bitcoin and stocks, a debit card with cashback options, and direct deposits. The consumer-part of the business is less profitable but growing rapidly. For instance, last quarter Cash App gross profit grew 125% YoY.
Square is my favorite investment and thus has the largest allocation in my portfolio. One reason I love Square’s stock is the moat it is building for its merchant services. No one has a plethora of quality options for SMBs like Square does. Switching costs are high, and once someone gets locked into the company’s ecosystem, they tend to stay forever. Merchants also love Square’s products because they save them time and make payments frictionless for their customers. I also believe the Cash App could be a $10 billion business on its own, and that it is objectively crushing Venmo, its main competitor, at the moment.
Lastly, the valuation is (fairly) reasonable. They have a P/S ratio of 6.2, consistent 40-50% sales growth, gross margins of 40%, and are around break-even on a free-cash-flow basis.
For further reading, check out friend of the newsletter and guest on the podcast Matt Cochrane’s recent post on the stock.
Okay, now to my personal accounts.
Individual Account
Trades Made:
Bought 4 shares of Square at $63
Bought 4 shares of MongoDB at $126.97 and 4 shares at $131.06
Sold out of iRobot (was 3% of account) at $46.88
Bought 20 shares of Yext at $14.04
I had a fairly busy month and actually sold some shares, which I try to refrain from as much as possible. iRobot was my worst investment in 2019, down around 50% from my cost-basis. I think there is a chance iRobot is a decent value-play at these levels, but I do not believe strongly in the long-term potential of the stock (hardware is a tough business), which is why I sold shares.
MongoDB is a high growth, money-losing SaaS company with a premium valuation (P/S of 19.5). It has been a volatile stock, but I believe they have a ton of long-term potential in disrupting the database market. It will be important for them to sustain their 50%+ sales growth, among other things, over the next five years if they are to deliver market-beating returns to shareholders.
Stocks on My Watchlist (Dropped Sonos)
StoneCo
Sea Limited Co.
Telaria
Mercadolibre
Starbucks
Roku
Match Group
Target
Roth IRA
Trades Made:
Bought 10 shares of the Schwab US Small-Cap ETF (SCHA)
Portfolio Performance
As a reminder, I started investing in 2017 and have made some rookie mistakes (penny stocks and put options) that have hurt my returns. So even though my stock picks have done fairly well, my returns are still lagging from those hurtful errors. I guess that’s the tough love most investors go through when they start out.
Alright, that’s it for my December 2019 portfolio update. Make sure to follow us on twitter @chitchatmoney, subscribe to this newsletter if you haven’t already, and check out our podcast here.
See you in a month,
Brett Schafer
*I am not a financial advisor. Nothing I write is advice or a recommendation.