Executive Summary

EXECUTIVE SUMMARY REPORT
In this report, we present the key points

to our unique short thesis on the
common stock of a popular mobile
payment service provider - Square Inc.
We believe the downside risks to
Square are significant and deserve
more attention. Our analysis suggests
that Squares stock has over 80%
downside based on a current market
capitalization of $6.1 billion (and stock
price of $17.4). This thesis is a
contrarian one as most of the analyst
community is extremely bullish on the
company. As several components of
our thesis have not been discussed by
analysts or the research community at
Square Inc. a Short large, we believe the perspective is
theSIS on a popular mobIle additive to the current information set
payment ServIce provIder available to investors on Squares
business prospects. Accordingly, we
recommend a short position against
Squares common stock to profit from
its potential future decline.
Abe Sheikh
March 1, 2017
If your business model relies on your customer being uninformed, you better have a good
marketing strategy. Jeff Bezos, Founder and CEO of Amazon.com Inc.
Square (pricing) is higher than Willie Nelson on the weekend. Senior Sales Manager, Credit
Card Processing Solutions, National Bankcard.
Copyright 2017 Abe Sheikh

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Contents______________________________________________________________
Chapter 1: Executive Summary Page 3
Chapter 2: Introduction to Square Inc. Full report
Chapter 3: Reasons for Squares rapid growth Full report
Chapter 4: Squares competitive landscape Full report
Chapter 5: Management and analysts view of Squares business prospects Full report
Chapter 6: Short thesis on Square Full report
Chapter 7: Modeling dynamics of Squares business Full report
Chapter 8: Valuation of Squares common stock Full report
Full report available upon request
Square Magstripe Reader, Contactless + Chip Reader and Stand
Source: November 2016 Investor Presentation

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Chapter 1: Executive Summary
Square a mobile payment service provider, that also offers financial and marketing
services is severely overvalued. With a market capitalization of $6.1 billion, the
market is pricing in high margin revenue growth over an extended period. Sell side
analysts are largely bullish on this company with a greenfield growth opportunity.
We estimate a fair value of Squares stock at $2.1 per share, which is roughly 90%
below current market levels of $17.4.
Exhibit 1: Current price vs. estimated fair value of Squares common stock
$20
$18
$16
Squares fair value is -90%
$14 below current price
$12
Per share
$10
$8
$6
$4
$2
$0
Current price Estimated value per share
Source: Author calculations
We believe Square is likely to underwhelm investors in a significant way on both the

revenue and margin front over the coming years for the following reasons:
1. Squares customer base is fundamentally unattractive: While most

merchant acquirers seek financially strong and commercially thriving customers,
Square targets exactly the opposite; desperate micro-merchants looking for a quick
and easy payment processing solution with low up-front cost. Square attempts to
onboard as many of these financially disadvantaged micro-merchants as possible to
its overpriced payment processing platform with free or highly subsidized debit and
credit card readers in the hope that a few successful micro-merchants will justify
the acquisition costs of the millions of unsuccessful others. This strategy has
worked to-date due to a first mover-advantage in micro-merchant payment
processing and a conducive economic environment. Squares anomalously high
transaction margins of over 1% and its string of surprisingly strong results over the
last five quarters can be explained by these dual tailwinds.

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Exhibit 2: Square has outperformed analysts expectations over the last five
quarters due to dual tailwinds of micro-merchant acquisitions and GPV growth
400 10.00%
350 9.00%
8.00%
300
REVENUES ($ MILLIONS)
7.00%
250 6.00%
SURPRISE
200 5.00%
150 4.00%
3.00%
100
2.00%
50 1.00%
0 0.00%
Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015
Actual Adjusted Revenue ($ million) Consensus Adjusted Revenue ($ million)

Surprise (%)
Period ending Actual Adjusted Consensus Surprise (%)

Revenue ($ Adjusted
million) Revenue ($
million)
Q4 2016 191.9 187.7 +2.2%
Q3 2016 177.8 172.9 +2.8%
Q2 2016 170.8 159.4 +7.2%
Q1 2016 146.2 134.6 +8.6%
Q4 2015 374.4 344.7 +8.6%
Source: Bloomberg, Author calculations
However, the hyperbolic growth Square has experienced over the last eight years is
not sustainable. Square needs a constant influx of new micro-merchants to
replenish its existing cohort of older micro-merchants, close to 70% of whom are at
risk of leaving the platform at some point during their respectively business
lifecycles.

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Exhibit 3: Most of Squares nearly three million customers are low
contributors to total GPV with a risk of falling out of the ecosystem
# of customers
High risk
customers
High risk customers
Contribution to GPV
Source: Author illustration
The underlying dynamics of Squares business are ugly, characterized by an

expensive mobile payment processing solution, a customer base with median card
sales of just over $400 a month, high levels of merchant and GPV attrition
reaching 40% and 20% in a normal year, respectively and potential recessionary
merchant and GPV attrition rates, exceeding 50% and 40%, respectively. This
dynamic will significantly dampen Squares Return on Invested Capital, compared to
other payment service providers, such as PayPal and Heartland Payment Systems,
who cater to a higher quality customer base.
Exhibit 4: GPV attrition estimates for Square compared to actual GPV attrition
rates for Heartland Payments during a normal year and a deep recession
45%
40%
40%
35%
ANNUAL GPV ATTRITION
30%
25%
20% 22.6%
20%
15%
10% 12%
5%
0%
Normal year Deep recession
Heartland Payments Square
Source: Author estimates, Heartland 2009, 2012, 2013, 2014, 2015 10K.

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2. Analysts comparing Square to PayPal or First Data are comparing
apples and oranges; Square has more in common with Fitbit and
GoPro: As a micro-merchant aggregator, Squares overpriced and commoditized
product caters to a sub-prime customer base, has high transaction expenses, no
moat, no network effects, no vertical integration, suffers from extreme competition
and has almost zero switching costs. This contrasts with PayPals payment
processing platform that caters to a prime customer base, has a monopolistic
presence as the internets preeminent online wallet, a funding mix that frequently
results in 100% margin transactions and high switching costs due to network effects
developed from engaging both buyers and sellers.
Exhibit 5: PayPal has structurally higher transaction profit margins than

Square
PayPal Square
3.50%
2.94%
3.00%
2.65%
2.50%
1.92%
2.00% 1.70%
1.50%
0.95% 1.01%
1.00%
0.50%
0.00%
Take-rate Expense rate Profit margin
Metric PayPal Square

Take-rate 2.65% 2.94%
Expense rate 0.95% 1.92%
Profit margin 1.70% 1.01%
Source: Square and PayPal Q3 2016 earnings, Author calculations

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Exhibit 6: Squares small ticket size results in high structural transaction
expenses as illustrated by three different Visa programs
Visa CPS / Retail Credit 2.49%
Visa CPS / Small Ticket Credit 2.23%
Visa Reg. Debit 1.83%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

square Transaction cost as % of $15 sale
Fee Visa Reg. Debit Visa CPS / Visa CPS /

Small Ticket Retail Credit
Credit
Interchange fee 0.05% + $0.22 1.65% + $0.04 1.51% + $0.10

Assessment fee 0.13% + $0.02 0.13% + $0.02 0.13% + $0.02
Processing fee 0.05% 0.05% 0.05%
Total transaction 0.23% + $0.24 1.83% + $0.06 1.69% + $0.12

cost
Transaction cost as 1.83% 2.23% 2.49%
% of $15 sale
Source: Visa, Author calculations
Square also stands in contrast to First Data a vertically integrated merchant

acquirer and payment processor that earns abnormal profits due to low customer
acquisition and payment processing costs.
Square has more in common with Fitbit and GoPro pioneers in the connected
fitness and action camera markets, respectively that severely undershot lofty
analyst projections because of the effects of brutal price competition in a
commoditized low-barriers-to-entry business.

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Exhibit 7: Squares industry and business shares significant similarities to
Fitbit and GroPro
Key attribute Square Fitbit GoPro
Pioneers in niche markets

Run by growth focused charismatic
CEOs
Low barriers to entry products, with few
network effects and low switching costs
Claim differentiation on brand appeal
and ecosystem vs. no-frills alternatives
and other established players offering
similar products
High R&D expenses relative to revenues
signifying short product cycles
Source: Author research
3. Extreme competition from ISOs/MSRs and traditional merchant

acquirers will limit Squares growth and margins: A look at the micro-
merchant mobile payment service provider landscape shows a bewildering number
of Square competitors offering cheaper no-frills alternatives or similar polished
products. Notable no-frills competitor Electronic Merchant Systems offers EMS+,
a service with a flat all-inclusive rate of 2.25% per swipe compared to Squares
2.75% - and a free card reader.
Exhibit 8: EMS+ offers a cheaper no-frills version of Square

Attribute Square EMS+
Swiped Rate 2.75% 2.25%

Keyed-in Rate 3.5% + $0.15 3.5% + $0.15
Monthly fee
Early termination fee
Annual fee
Monthly minimum
Setup fee
Free magstripe card reader
Free app
Ecosystem (Invoicing,
Inventory management,
receipts etc.)
Source: Author calculations, toptenreviews.com
Products with similar, and sometimes superior pricing, hardware and software to
Square, include Spark Pay by Capital One, QuickBooks GoPayment by Intuit,
PayPal Here by PayPal, Clover by First Data, and Pay Anywhere.
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Exhibit 9: Highly-rated mobile payment service providers as ranked by
toptenreviews.com
Source: http://www.toptenreviews.com/business/payment-processing/best-mobile-credit-card-processing/
Traditional merchant account providers, which includes many Independent Sales

Organizations (ISOs) and Member Service Providers (MSRs), now also offer mobile
processing rates that make Squares rates look higher than Willie Nelson on a
weekend. First Datas Clover has been gaining market share with over 500,000
devices shipped and 16% market share amongst its SMB clients establishing a
strong presence in a Square target market.
Exhibit 10: Clovers mobile payment service offering is gaining traction

amongst merchants
Source: First Data investor presentation
There are also several new entrants. Chase Paymentech will soon be releasing a
micro-merchant mobile payment processing solution with flat rates lower than
Squares. Shopify has recently introduced a suite of POS products competing for

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micro- and small businesses. Verifone will soon be launching Carbon, a payment
terminal with a POS platform in a single device. And Poynt 5 and Poynt Smart
Terminal are new open-architecture POS competitors to Square.
Exhibit 11: Poynt Smart Terminal will soon be a Square competitor
Source: https://poynt.com/
4. Square is over-earning; Gross margins will come down due to

lower take-rates and stubbornly high transaction costs: Squares
outsized gross margins are likely to come down substantially over time as it
experiences pressure on take-rates from extreme competition and its efforts to move
upmarket to merchants with higher GPV, all the while experiencing stubbornly high
transaction costs, particularly high interchange and assessment fees. Analysts are
extremely sanguine on these key drivers of Squares profitability forecasting
stability far into the future despite several warning signs. PayPals decline in take-
rates and transaction margins over the last few years provides us with empirical
evidence and a historical precedent, while Heartlands transaction profit margin a full
fifty percent below Squares show us the real-world challenges of merchant
acquirers moving up-market.

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Exhibit 12: GPV, take rates and transaction profit margins are inversely
correlated, as PayPals experience shows
110 3.30%
3.10%
100
2.90%
GPV in USD millions
90 2.70%
2.50%
Rate
80
2.30%
70 2.10%
1.90%
60
1.70%
50 1.50%
Quarterly GPV Take rate Transaction profit margin
Metric 3/31/2014 6/30/2014 9/30/2014 12/31/2014 9/30/2014 6/30/2016 9/30/2016 12/31/2016

Quarterly
GPV 53.676 56.736 58.184 66.039 58.184 86.208 87.403 99.4
Take-rate 3.11% 3.02% 3.01% 2.98% 3.01% 2.69% 2.65% 2.63
Transaction
profit 2.15% 2.09% 2.09% 2.08% 2.09% 1.75% 1.70% 1.67%
Source: https://investor.paypal-corp.com/, Author calculations
Exhibit 13: Squares transaction profit margins are double Heartlands due to a
focus on financially disadvantaged micro-merchants
1.20%
1.00%
0.80%
Transaction margin
0.60%
0.40%
0.20%
0.00%
Square Heartland Payment Systems

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Metric Square Heartland Payment
Systems
Take rate 2.93% 2.30%

Expense rate 1.92% 1.80%
Transaction profit margin 1.01% 0.50%
Source: Heartland 10K, Square Q3 Shareholder letter
Interchange and assessment fees, which comprise over 80% of the cost of a typical
transaction, are highly persistent as evidence from a Federal Reserve study over the
last six years shows. In the card processing food chain, card networks like Visa
and MasterCard call the shots. Square does not have the influence to maintain its
high pricing structure or retain its successful clients.
Exhibit 14: Interchange fees are likely to remain stubbornly high as illustrated
by their persistence over the last six years
1.60%
Interchange fee as % of average transaction
1.40%
1.20%
1.00%
value
0.80%
0.60%
0.40%
0.20%
0.00%
2009 2011 2012 2013 2014 2015
Dual-message Single-message All Networks
Source: https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm
5. Square has a limited Target Addressable Market in the U.S. and

internationally: Squares over-bullish management team has misled the analyst
community on the potential size of their TAM in the U.S., by repeatedly citing
success with large sellers and U.S. card transaction volume of $10 trillion. The
reality is that 99%+ of Squares customers, by number, are financially disadvantaged
micro-merchants, with only a handful of SME customers. Squares prospects with
large companies are extremely limited. For a business processing debit and credit
card transactions with an average ticket size of $9 and monthly GPV greater than
$7,700, leaving Square for a merchant account becomes economically preferable,

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due to special Visa/MasterCard small ticket rates. For businesses with higher
average ticket sizes, the volume threshold is significantly lower due to the cap on
debit card rates imposed by the Durbin Amendment. For example, for a merchant
with an average ticket size of $30, the monthly GPV threshold to leave Square for a
merchant account falls to $4,400.
Exhibit 15: Ratio of Squares cost to merchant account Squares pricing is
unfavorable compared to a merchant account for any significant volume
and/or large ticket size
Ticket size
Volume $ 3 $ 6 $ 9 $ 12 $ 15 $ 18 $ 21 $ 24 $ 27 $ 30 $ 33 $ 36 $ 39 $ 42 $ 45 $ 48 $ 51 $ 54 $ 57 $ 60 $ 63
$ 200 0.11 0.11 0.11 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
$ 700 0.26 0.31 0.33 0.34 0.34 0.34 0.34 0.35 0.35 0.35 0.36 0.36 0.36 0.36 0.36 0.36 0.36 0.37 0.37 0.37 0.37
$ 1,200 0.35 0.43 0.47 0.49 0.51 0.49 0.51 0.52 0.52 0.53 0.54 0.54 0.55 0.55 0.55 0.55 0.56 0.56 0.56 0.56 0.56
$ 1,700 0.40 0.52 0.58 0.61 0.63 0.61 0.63 0.65 0.66 0.67 0.68 0.69 0.69 0.70 0.70 0.71 0.71 0.72 0.72 0.72 0.72
$ 2,200 0.44 0.59 0.66 0.70 0.73 0.70 0.73 0.75 0.77 0.78 0.79 0.80 0.81 0.82 0.83 0.83 0.84 0.84 0.85 0.85 0.86
$ 2,700 0.47 0.64 0.72 0.78 0.81 0.78 0.81 0.83 0.85 0.87 0.89 0.90 0.91 0.92 0.93 0.94 0.94 0.95 0.96 0.96 0.97
$ 3,200 0.49 0.68 0.78 0.84 0.88 0.83 0.87 0.90 0.93 0.95 0.97 0.98 0.99 1.01 1.02 1.03 1.03 1.04 1.05 1.05 1.06
$ 3,700 0.51 0.71 0.82 0.89 0.93 0.88 0.93 0.96 0.99 1.01 1.03 1.05 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.14
$ 4,200 0.52 0.74 0.85 0.93 0.98 0.93 0.97 1.01 1.04 1.07 1.09 1.11 1.13 1.14 1.16 1.17 1.18 1.19 1.20 1.21 1.21
$ 4,700 0.53 0.76 0.88 0.96 1.02 0.96 1.01 1.05 1.09 1.12 1.14 1.16 1.18 1.20 1.21 1.23 1.24 1.25 1.26 1.27 1.28
$ 5,200 0.54 0.78 0.91 1.00 1.06 0.99 1.05 1.09 1.13 1.16 1.18 1.21 1.23 1.25 1.26 1.28 1.29 1.30 1.31 1.32 1.33
$ 5,700 0.55 0.79 0.93 1.02 1.09 1.02 1.08 1.12 1.16 1.19 1.22 1.25 1.27 1.29 1.31 1.32 1.34 1.35 1.36 1.37 1.38
$ 6,200 0.55 0.81 0.95 1.05 1.11 1.04 1.10 1.15 1.19 1.23 1.26 1.28 1.31 1.33 1.35 1.36 1.38 1.39 1.40 1.41 1.42
$ 6,700 0.56 0.82 0.97 1.07 1.14 1.07 1.13 1.18 1.22 1.26 1.29 1.32 1.34 1.36 1.38 1.40 1.41 1.43 1.44 1.45 1.46
$ 7,200 0.57 0.83 0.99 1.09 1.16 1.09 1.15 1.20 1.25 1.28 1.32 1.35 1.37 1.39 1.41 1.43 1.45 1.46 1.48 1.49 1.50
$ 7,700 0.57 0.84 1.00 1.11 1.18 1.10 1.17 1.22 1.27 1.31 1.34 1.37 1.40 1.42 1.44 1.46 1.48 1.49 1.51 1.52 1.53
$ 8,200 0.57 0.85 1.01 1.12 1.20 1.12 1.19 1.24 1.29 1.33 1.37 1.40 1.42 1.45 1.47 1.49 1.51 1.52 1.54 1.55 1.56
$ 8,700 0.58 0.86 1.03 1.14 1.21 1.13 1.20 1.26 1.31 1.35 1.39 1.42 1.45 1.47 1.49 1.51 1.53 1.55 1.56 1.58 1.59
$ 9,200 0.58 0.87 1.04 1.15 1.23 1.14 1.22 1.28 1.33 1.37 1.41 1.44 1.47 1.49 1.52 1.54 1.56 1.57 1.59 1.60 1.62
$ 9,700 0.58 0.87 1.05 1.16 1.24 1.16 1.23 1.29 1.34 1.39 1.42 1.46 1.49 1.51 1.54 1.56 1.58 1.60 1.61 1.63 1.64
$ 10,200 0.59 0.88 1.05 1.17 1.25 1.17 1.24 1.30 1.36 1.40 1.44 1.47 1.51 1.53 1.56 1.58 1.60 1.62 1.63 1.65 1.66
Exhibit 16: Rising volumes assuming a $9 average ticket size result in Square
becoming uneconomical at GPV of $7,700 a month

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Squares business model does not work as well in other developed markets, such as
the U.K., Europe and Australia, and emerging markets, such as China and India. In
the case of the U.K., Europe and Australia, consumer interchange fees are heavily
regulated at very low flat rates between 0.2%-0.3%, so Squares all-inclusive flat
payment processing fee is far less attractive to merchants. In the case of Emerging
Markets, low levels of credit card penetration and prevalence of cash transactions
for micropayments make Squares solutions significantly less attractive. In this
respect, Square also faces regulatory risks that would potentially make its business
model far less appealing for micro-merchants in the U.S. and Canada. A cap on
credit card interchange fees, like debit card swipe fees implemented by the Durbin
Amendment, could be potentially devastating to Square, yet is not a possibility being
considered by analysts.
Exhibit 17: European interchange rates on MasterCard consumer credit cards

are capped at low rates making Squares flat rates less attractive
Source: Global Payments Inc.
Square is also on the wrong side of a powerful technological megatrend towards

digital payments and its hardware gateways risk obsolescence from larger
innovative digitally focused payment solution providers, such as Apple, Google and
PayPal, and even new tokenization technology such as that used by Apple Pay and
Cartwheel Point of Sale. In fact, countries like China are leap-frogging debit and
credit cards to move straight to online payment solutions like Alipay, WeChat
Payment and Baidu Wallet.
6. Analysts are overestimating growth of Square Capital, which will

likely experience a fate similar to other non-bank lenders, like
OnDeck Capital: Squares core payment processing business lacks operating
leverage, so to justify lofty price targets analysts are modeling rapid revenue and
margin growth from upselling of Squares value added services particularly
Square Capital. Square Capital is an unattractive source of funding for all but the
most desperate and financially disadvantaged micro-merchants given APRs in the
region of 16%-28%. In addition to larger merchants, Square Capital also presents
an economically inferior solution for successful micro-merchants compared to

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alternatives. SBA working capital loans targeted at profitable and growing micro-
merchants have APRs a full 6% to 18% lower than Square Capital.
Exhibit 18: SBA micro- and small loan programs offer more compelling
alternatives to Square Capital for successful micro-merchants
Max Loan Maximum interest
Program Amount Use of proceeds Maturity rates Who qualifies Benefits to Borrowers
Purchase machinery & equipment, Direct loans from nonprofit
fixtures, leasehold improvements; Negotiable with Must be a for profit intermediary lenders; Fixed-rate
finance increased receivables; working Shortest term intermediary. Subject to business & meet SBA financing; Very small loan
Non-7(a) capital. Cannot be used to repay possible, not to either 7.75 or 8.5% above size standards; show amounts; Technical assistance
Loans $50,000 existing debt. exceed 6 years intermediary cost of funds. good character, credit, available
May be used for revolving lines of Revolving Lines of Loans $50,000 or less; management, and Fast turnaround, Streamlined
credit (up to 7 year maturity) or for a Credit including prime+ 6.5%; Loans over ability to repay. Must process; Easy-to-use line of
SBAExpress $350,000 term loan (same as 7(a)). term out period.
Depends on $50,000;
Loans prime
less than + 4.5%$0 - be an eligible type of
7 years: credit
ability to repay. $25,000, Prime + 4.25% business. Prepayment
Term Loan. Expansion/ renovation; new Generally, $25,001 - $50,000, P + penalty for loans with
construction, purchase land or working capital & 3.25% Over $50,000, Prime maturities of 15 years
buildings; purchase equipment, machinery & + 2.25%; Loans 7 years or or more if prepaid Long-term financing; Improved
fixtures, lease-hold improvements; equipment (not to longer: 0 - $25,000, Prime + during first 3 years. (5% cash flow; Fixed maturity; No
working capital; refinance debt for exceed life of 4.75% $25,001 - $50,000 P year 1, 3% year 2 and balloons; No prepayment penalty
7(a) Small compelling reasons; inventory or equipment) is up + 3.75% Over $50,000, 1% year 3) (under 15 years). Plus
Loans $350,000 starting a business to 10 years; real Prime + 2.75%; Can also streamlined process.
Source: https://www.sba.gov/sites/default/files/files/Loan-Chart-Baltimore-June-2016-Version-A.pdf
Square Capital is an attempt by management to stem the effects of GPV attrition

due to successful micro-merchants leaving Squares overpriced payment processing
platform for a more competitive solution. The decline of other non-bank online loan
providers also reliant on fickle third-party funding sources, like OnDeck Capital,
should serve as a cautionary tale for Square Capital.
Exhibit 19: Square Capital has similarities to OnDeck Capital
Key attribute Square Capital OnDeck Capital
Focus on micro- and small businesses

Non-bank disruptive fintech firms
Claim superior underwriting due to proprietary
data and analytics engine
Short-term high APR loans used for working
capital
Third-party funding platform
Source: OnDeck Capital 10K, Author research

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Exhibit 20: OnDeck Capital has severely undershot analysts projections due
to its reliance on third-party investors as a source of funding
Source: Bloomberg
7. Micro-merchants have neither the business need nor financial

wherewithal to afford Squares me-too software products:
Squares other value added services consist of me-too software solutions, such
as Square Payroll and Invoice ( la Quickbooks), Employee Management ( la
Zenefits), Cash ( la Venmo), Online Store ( la Shopify) and Appointments ( la
Google Calendar). The median Square customer is a financially disadvantaged
micro-merchant with approximately $400 of card sales that has neither the business
need nor the financial wherewithal to purchase complex accounting, employee
management, email marketing, and loyalty software. Given sales of Squares
software are tied to the number of customers subscribing to it, not GPV volume, it is
highly likely that software sales will undershoot analyst forecasts. Another indicator
of the low demand Squares ancillary software is likely to generate is the lack of any
mention of ecosystem by experts when comparing payment service providers.
Exhibit 21: Squares software products are expensive for the median Square
micro-merchant with $5000 of annual card sales
Square software Annual cost
Payroll subscription $25 + $5 x 3 employees x 12 = $480

Employee Management subscription $5 x 3 employees x 12 = $180
Appointments subscription $50 per month X 12 = $600
Email Marketing subscription $15 per month X 12 = $180
Loyalty subscription $25 per month X 12 = $300
Gift cards purchase $40 per pack X 2 = $80
Total $1,820
Source: www.squareup.com, Author calculations

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8. Unattractive industry economics and poor capital allocation
decisions will detract from shareholder returns: Extreme competition
and the fast pace of innovation in mobile hardware and software payment providers
has led to unattractive industry economics with a need for extremely high R&D. In
the twelve months ending September 30, 2016, Square devoted a full $263 million to
product development, or 42% of adjusted revenues of $630 million. Given the lack
of traction Squares me-too software products are likely to have with micro-
merchants, we believe the return on this R&D will be poor.
Exhibit 22: Squares product development spending as % of Adjusted

Revenues has been over 30% over the last nine quarters
60%
50%
R&D as % of Adjusted Revenues
40%
30%
20%
10%
0%
Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q4 2015 Q4 2015 Q4 2015 Q4 2015
Source: Square Shareholder Letters
Operating in a commoditized yet fast faced industry has led to high levels of capital
expenditures (CAPEX), in the form of regular acquisition spending. For example, to
get in-house access to the latest NFC/EMV technology for payment cards, in 2015
Square acquired Kili Technology a fabless semiconductor company based in
Canada. More recently, Square also bought a software technology related to
network connections for an undisclosed amount. We believe such regular
acquisitions, which highlight the elevated CAPEX needs of this business, will
continue, negatively impacting shareholder returns.
Before focusing more exclusively on the current growth opportunity in micro-

merchant card processing, CEO Jack Dorsey spent significant shareholder
resources developing a failed food delivery business, first organically through
Square Order, then through three acquisitions Caviar in 2014 for $90 million,
Fastbite in 2015 and Main Line Delivery in 2016. The returns on these investments
have so far been poor, as these businesses continue to lose money. A misfit food

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delivery business shows a history of poor capital allocation. CEO Jack Dorsey is
stretched thin, as he is also currently the CEO of Twitter, a company desperately
trying to turnaround operations.
Exhibit 23: Square is a prolific issuer of Stock Based Compensation

30.000%
25.000%
SBC AS % OF ADJUSTED REVENUES
20.000%
15.000%
10.000%
5.000%
0.000%
Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q4 2015 Q4 2015 Q4 2015 Q4 2015
Source: Square shareholder letters, Author calculations
Staying true to its Silicon Valley roots, Square is a prolific issuer of stock for
acquisitions and to employees as compensation, thereby diluting existing and future
shareholders if the practice continues. Over the twelve months ended 12/31/2016,
Square issued $138.8 million of Stock Based Compensation (SBC), primarily to its
engineering, design, and product personnel in product development ($91.4 million).
This comes to 20% of the Companys Adjusted Revenue of $687MM over the same
period. Given what we believe to be Squares limited prospects for profitable
growth, we believe this generous SBC will detract from shareholder value. Using a
dilution adjusted Black-Scholes model, we calculate the negative impact value on
equity of outstanding stock options at the current stock price to be approximately
$963.5 million.
Exhibit 24: Squares outstanding options are valued at almost $1 billion, based
on a $17.43 stock price, and represent an overhang on the companys
valuation
Current stock price $17.43
Options Outstanding 86.7 million
Average Strike Price $7.32
Average expiration term 7.4 years
Standard deviation of Square stock 43.5%
Risk free rate 2.4%
Value per option $11.37
Valuation of outstanding options based on $985.5 million
dilution adjusted Black-Scholes

18
9. The market is being too optimistic; Squares fair value is 80%
below current levels: By valuing Square at $6.1 billion today, the market is
implying a business that will grow revenues at close to 26% over the next ten years
to over $7 billion, generate over $1.4 billion in operating income at margins close to
20% a year and generate ROICs close to 20% a year. This outcome is highly
unlikely in our opinion given the realities of Squares customer base and business
model.
Exhibit 25: Square Combining reverse DCF with a customer dynamics model
shows the markets implied steady state customer and revenue figures
Key metric Market implied steady state
# of customers 19.3 million

Percentage of micro-merchant market 70%
GPV $531 billion
% GPV > $500,000 14.7%
Transaction margin 1.04%
Square Capital origination volume $9.1 billion

Square Capital gain-on-sale + interest $548 million
revenues*
Software subscription revenues $269 million
Instant deposit revenues $48 million
Invoice revenues $48 million
Food delivery revenues $122 million
Subscription and services-based $1,036 million

revenue
Square hardware revenue $402 million
Total revenues $7.0 billion

Operating income $1.4 billion
Operating margin 20%
Return on invested capital 20%
Terminal cost of capital 8%
Source: Author assumptions
Under more realistic conditions, Square will likely see a sharp deceleration in
revenue growth over time as the realities of its fickle and financially disadvantaged
customer base become more apparent.
Our estimate of Squares long-term market share of the micro-merchant card

payment processing market is approximately 7 million merchants, with strong

19
competition from PayPal Here, Clover, QuickBooks GoPayment, Spark Pay, and
Shopify.
Exhibit 26: Estimate of steady state micro-merchant market share of the micro-
merchant card payment processing market
30%
25%
25%
20%
15% 15% 15%
15%
10%
10%
5% 5%
5% 3% 3% 3% 3%
0%
# of customers in
Company Percentage millions
Square 25% 6.88
PayPal Here 15% 4.13
Clover 15% 4.13
QuickBooks GoPayment 10% 2.75
Spark Pay by Capital One 5% 1.38
Shopify 5% 1.38
Chase Paymentech 2.5% 0.69
Pay Anywhere 2.5% 0.69
Verifone Carbon 2.5% 0.69
Poynt 2.5% 0.69
Others* 15% 4.13
Total 100% 27.50
* Others include "no-frills" solutions like EMS+ and Cartwheel Point of Sale, ISOs/MSRs like Flagship ROAMpay, National Bankcard and
CreditCard Processing.com. Author estimates.

20
Exhibit 27: Aggregate Square revenues split between transaction, software and hardware revenues over the next
20 years
$2,500 18.00%
16.00%
$2,000
14.00%
12.00%
Revenue Growth Rate

$1,500
Sales (millions)
10.00%
8.00%
$1,000
6.00%
4.00%
$500
2.00%
$- 0.00%
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036
Subscription and services-based revenue (millions) $153 $177 $204 $232 $263 $293 $324 $357 $392 $430 $456 $472 $483 $490 $496 $501 $506 $510 $515 $519
Square hardware (millions) $53.83$62.92$72.20$81.58$91.03$100.5$110.0$119.5$129.0$138.5$141.5$143.1$144.1$144.6$144.9$145.0$145.1$145.2$145.2$145.2
Transaction revenues (millions) $602 $695 $787 $875 $957 $1,033$1,101$1,162$1,216$1,314$1,388$1,430$1,453$1,466$1,473$1,478$1,480$1,481$1,482$1,482
Revenue Growth Rate 16.41%15.67%13.63%11.82%10.25%8.79% 7.68% 6.76% 5.98% 8.33% 5.51% 2.99% 1.70% 1.01% 0.64% 0.44% 0.33% 0.27% 0.24% 0.23%

21
In a steady state, we believe Square will generate revenues of just over $2 billion,
GAAP operating margins of 15%, Return on Invested Capital of 10%, with transaction
margins close to 0.77% on a GPV of $171 billion. This compares to PayPals revenues
of $6.4 billion, GAAP operating margins of 20%, Return on Invested Capital of 9%, with
transaction margins of 1.80% on a GPV of $354 billion.
Exhibit 28: Assumptions underlying DCF modeling

Key metric Steady state assumption PayPal TTM 2016
# of customers 6.9 million 197 million

GPV $171 billion $354 billion
% GPV > $500,000 14.6% N/A
Transaction margin 0.77% 1.80%
Transaction revenues $1.3 billion $6.4 billion
Square Capital Origination $3 billion $8.4 billion**

volume
Square Capital gain-on-sale + $173 million N/A
interest revenues
Software subscription revenues $85 million N/A
Instant Deposit revenues $17 million N/A
Invoices revenues $43 million N/A
Food delivery revenues $112 million N/A
Total subscription and $500 million $1.352 billion

services-based revenues
Square hardware revenue $138 million N/A
Total revenues $2.1 billion $6.4 billion
GAAP operating income $315 million $1.59 billion

Non-GAAP operating income $420 million $2.17 billion
GAAP operating margin 15% 20.5%
Non-GAAP operating margin 20% 28%
Return on invested capital 10% 8.8%
Initial Cost of Capital 10% N/A
Terminal Cost of Capital 8% N/A
We estimate a fair value of Squares stock at $2.1 per share, which is roughly 90%
below current market levels of $17.4.

22
Exhibit 29: Current price vs. estimated fair value of Squares common stock
$20
$18
$16
Squares fair value is -90%
$14 below current price
$12
Per share
$10
$8
$6
$4
$2
$0
Current price Estimated value per share
Terminal cash flow (in millions) $172.09

Terminal cost of capital 8.00%
Terminal value (in millions) $3,071.05
Present Value of Terminal value (in
millions) $1,236.74
Present Value of Cash Flow over next 10
years (in millions) $91.24
Sum of Present Values (in millions) $1,327.98
Value of operating assets (in millions) $1,327.98
- Debt (in millions) $96.06
+ Cash (in millions) $514.30
Value of equity (in millions) $1,746.22
- Value of options (in millions) $985.45
Value of equity in common stock (in
millions) $760.77
Number of shares (in millions) 366.59
Estimated value per share $2.1

23

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EXECUTIVE SUMMARY REPORT

In this report, we present the key points

Copyright 2017 Abe Sheikh

Chapter 1: Executive Summary Page 3

Chapter 2: Introduction to Square Inc. Full report

Chapter 3: Reasons for Squares rapid growth Full report

Chapter 4: Squares competitive landscape Full report

Chapter 6: Short thesis on Square Full report

Chapter 7: Modeling dynamics of Squares business Full report

Chapter 8: Valuation of Squares common stock Full report

Full report available upon request

Square Magstripe Reader, Contactless + Chip Reader and Stand

Source: November 2016 Investor Presentation

Copyright 2017 Abe Sheikh

We believe Square is likely to underwhelm investors in a significant way on both the

1. Squares customer base is fundamentally unattractive: While most

Copyright 2017 Abe Sheikh

Actual Adjusted Revenue ($ million) Consensus Adjusted Revenue ($ million)

Period ending Actual Adjusted Consensus Surprise (%)

Copyright 2017 Abe Sheikh

High risk customers

The underlying dynamics of Squares business are ugly, characterized by an

Heartland Payments Square

Copyright 2017 Abe Sheikh

Exhibit 5: PayPal has structurally higher transaction profit margins than

Metric PayPal Square

Copyright 2017 Abe Sheikh

Visa CPS / Retail Credit 2.49%

Visa CPS / Small Ticket Credit 2.23%

Visa Reg. Debit 1.83%

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Fee Visa Reg. Debit Visa CPS / Visa CPS /

Interchange fee 0.05% + $0.22 1.65% + $0.04 1.51% + $0.10

Total transaction 0.23% + $0.24 1.83% + $0.06 1.69% + $0.12

Source: Visa, Author calculations

Square also stands in contrast to First Data a vertically integrated merchant

Copyright 2017 Abe Sheikh

Pioneers in niche markets

Source: Author research

3. Extreme competition from ISOs/MSRs and traditional merchant

Exhibit 8: EMS+ offers a cheaper no-frills version of Square

Swiped Rate 2.75% 2.25%

Traditional merchant account providers, which includes many Independent Sales

Exhibit 10: Clovers mobile payment service offering is gaining traction

Source: First Data investor presentation

Copyright 2017 Abe Sheikh

Exhibit 11: Poynt Smart Terminal will soon be a Square competitor

4. Square is over-earning; Gross margins will come down due to

Copyright 2017 Abe Sheikh

Quarterly GPV Take rate Transaction profit margin

Metric 3/31/2014 6/30/2014 9/30/2014 12/31/2014 9/30/2014 6/30/2016 9/30/2016 12/31/2016

Copyright 2017 Abe Sheikh

Take rate 2.93% 2.30%

Source: Heartland 10K, Square Q3 Shareholder letter

Dual-message Single-message All Networks

5. Square has a limited Target Addressable Market in the U.S. and

Copyright 2017 Abe Sheikh

Source: Author calculations

Source: Author calculations

Copyright 2017 Abe Sheikh

Exhibit 17: European interchange rates on MasterCard consumer credit cards

Source: Global Payments Inc.

Square is also on the wrong side of a powerful technological megatrend towards

6. Analysts are overestimating growth of Square Capital, which will