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Finance

Which of Jack Dorsey’s Companies is a Better Buy?

Co-founded by Jack Dorsey, Twitter, Inc. (TWTR) and Square, Inc. (SQ) are two of the world’s top online platforms. A COVID-19 pandemic-ready business model helped both the stocks to great gains in 2020. While Dorsey launched social networking platform TWTR in 2006, point-of-sale software provider SQ was launched three years later.

Because   pandemic-driven trends are expected to continue after the pandemic is vanquished, both the stocks are well positioned to keep gaining.

While TWTR has returned 139.8% over the past five years, SQ has gained 1781.9%. In terms of past-year performance, SQ is a clear winner with 234.6% returns versus TWTR’s 43.5%. But which of these two stocks is a better pick now? Let us find out.

Latest Movements

TWTR announced on January 12 that it has taken several steps to protect its platform from attempts to use it to incite violence, organize attacks, or deliberately share misleading information, ahead of the U.S. Presidential Inauguration on January 20. It has updated its coordinated harmful activity policy. It also permanently suspended President Donald Trump’s private account due to the risk of further incitement of violence by him after a close review of recent tweets from the account and the context around them.

The company announced on January 11 that for the first time there were more than two billion tweets about gaming throughout 2020. On December 17, TWTR announced its plans to relaunch account verification to streamline its privacy policies. The company will begin enforcing the new verification process on January 20.

SQ announced on December 14, that in partnership with POWDR, an adventure lifestyle company, its commerce platform now powers payments, e-commerce, and point of sale transactions at nearly a dozen renowned ski resorts across the U.S. and Canada. SQ launched Shift Scheduling on December 10, which is a new first-party scheduling feature that works seamlessly with the company’s Team Management and Payroll offerings to deliver  a robust, consolidated labor management solution for employers.

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Also, in December, the company announced the availability of Square Appointments on Square Register, a point-of-sale solution built specifically  for beauty and wellness sellers that now runs on SQ’s first-class hardware. With Square Appointments on Square Register, sellers can unlock advanced features, such as modern aesthetics, seamless experiences, and safe checkouts.

SQ announced on November 25 that it has entered into a definitive agreement with Credit Karma to acquire its tax business, Credit Karma Tax, on behalf of Cash App.

Recent Financial Results

TWTR’s revenue for the third quarter ended September 30, 2020  increased 13.7% year-over-year to $936.20 million, driven primarily by greater spending by  advertisers. The company’s revenue from advertising has increased nearly 15% year-over-year to $808 million, with a 27% year-over-year increase in total ad engagements. While U.S. revenue increased 10% year-over-year to $513 million, international revenue increased 18% to $424 million. Its Average Monetizable Daily Active Usage (mDAU) increased by 29% year-over-year to 187 million. And its EPS increased 11.8% year-over-year to $0.19.

SQ’s total revenue has climbed 139.6% year-over-year to $3.03 billion for the third quarter ended September 30, 2020, driven primarily by the appreciation of Bitcoin. Bitcoin revenue has increased 1,001.8% year-over-year to $1.63 billion. The number of average daily transacting active Cash App customers nearly doubled from the same period last year. Its net income has increased 24.2% year-over-year to $36.50 million, yielding EPS of $0.34, up 36% year-over-year.

Past and Expected Financial Performance

TWTR’s revenue has increased at a CAGR of 12.2% over the past three  years. Analysts expect the company’s revenue to increase 16.8% for the quarter ended December 31, 2020, 18.4% for the quarter ending March 31, 2021, and 22% in fiscal 2021. TWTR’s EPS is expected to grow 36.4% for the quarter ending March 31, 2021, and 226.8% in 2021.

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In comparison, , SQ’s revenue has increased at a CAGR of 55.1% over the past three years. The market expects SQ’s revenue to increase 386.8% for the quarter ended December 31, 2020, 113% for the quarter ending March 31, 2021, and 38.7% in the current year. The company’s EPS is expected to grow 1,050% for the quarter ending March 31, 2021, and 48.7% in fiscal 2021.

Thus, SQ has an edge over TWTR here.

Profitability

SQ’s trailing-12-month revenue is 2.23 times TWTR’s. However, TWTR is more profitable with a gross margin of 63.7% versus SQ’s 32.2%.

Also, TWTR’s leveraged free cash flow margin of 9.7% compares favorably with SQ’s negative values.

Valuation

In terms of forward P/E, SQ is currently trading at 298.27x, much more expensive than TWTR’s negative value. Moreover, SQ is more expensive both in terms of trailing-12-month price/cash flow (318.63x versus 39.71x), and trailing-12-month EV/S (13.38x versus 9.90x).

In terms of trailing-12-month P/S, SQ’s 13.01x is 21.2% higher than TWTR’s 10.73x.

Though SQ looks much more expensive compared to TWTR, it is worth paying this premium considering SQ’s significantly higher earnings growth potential.

POWR Ratings

Both TWTR and SQ are rated “Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for TWTR and SQ:

TWTR has a “B” for Trade Grade, and Industry Rank, and a “C” for Buy & Hold Grade, and Peer Grade. It is currently ranked #23 of 69 stocks in the Internet industry.

SQ holds an “A” for Trade Grade, and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #28 of 224 stocks in the Financial Services (Enterprise) industry.

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The Winner

Both TWTR and SQ are good investment bets considering their continued innovations and market dominance. However, SQ appears to be a better buy despite trading at a significantly higher valuation based on its higher revenue and earnings growth potential.

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SQ shares were trading at $231.01 per share on Wednesday afternoon, up $3.49 (+1.53%). Year-to-date, SQ has gained 6.14%, versus a 1.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More…

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