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A Framework for Better Understanding Equity Valuations

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  Introduction There is a lot of sentiment online and when I am talking to friends about a certain stock's share price that goes along the lines of, “No way I’m buying Zoom with a   P/E of 1,000!”, or “I can’t believe Cloudflare is trading at 50x sales, that's crazy!”. Are these trading multiples outliers, general market euphoria over technology stocks, or are there explainable reasons for these outsized trading ratios? This post intends to provide a few hypotheses and better understand the logic (or lack thereof) for these trading ratios.  This analysis started out by pulling standardized financial data from SimFin (no affiliation), removing companies that have less than $100 million in annual revenue to reduce noise in the data, removing companies with incomplete data in SimFin’s database, and only focusing on companies that have their primary stock exchange listing in the United States (Nasdaq, etc.). For the sake of this discussion, I’m focusing on the Application Soft
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Square, Inc. (SQ) - Investment Thesis

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Company overview For those not familiar with Square’s business, I highly recommend reading their most recent Investor Presentation before diving into this investment thesis as this will build upon having an understanding of the current business.  As a quick primer, Square currently has two ecosystems: 1) their Seller ecosystem that enables small business owners to manage almost their entire business from end-to-end payment acceptance, payroll software and business loans via Square Capital, and 2) Cash App that is similar to a modern consumer bank with P2P transactions, debit card, and a simple platform for investing in Bitcoin and shares of US-listed companies.   2020 Investment Catalysts 1. COVID-19 has accelerated transition of offline commerce to modern Point of Sale (POS) systems such as Square It’s estimated that over 7.5 million small businesses are at risk of closure due to COVID-19. Undoubtedly many of them are Square merchants that also have Square loan
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