Technology Research

Financial Technology & Payments

U.S. Equity Research February 24, 2023 Industry Commentary

SQ: We Applaud Strong EBITDA;

COIN: More of the Same; GPN:
Confusing Guide
SQ, COIN, GPN Model Updates; Raise PT for SQ and
GPN
Summary Price Rating
Company Symbol (2/23) Prior Curr PT

COIN, SQ, and GPN each recently reported 4Q results. Block Inc. SQ $74.15 – Neutral $80.00
Coinbase COIN $62.36 – U-P $30.00
SQ: Strong EBITDA is a positive. Investors seeking cost discipline should be Global, Inc.
pleased with the explicit $1.3bn EBITDA guide for 2023. We are incrementally Global Payments GPN $113.75 – Neutral $120.00
Inc.
constructive on SQ's efforts to boost profitability, and are happy to see expected
1Q GP estimates increase vs. our prior estimates across the ecosystems. Raising Source: Bloomberg and Mizuho Securities USA
PT to $80 from $70 prior.
COIN: 4Q was more of the same as the business remains challenged. While the
focus on costs is helpful, we remain cautious as take rates are declining and the
January crypto boost may prove unsustainable. Our estimates are increasing, but
this is mainly due to higher interest income which isn't core. PT unchanged at
$30.
GPN: 4Q results were OK, but guidance is confusing. We were surprised to
see that EVO was included in the 2023 guidance, even though the acquisition
has yet to close. This is highly unusual. Updating our model given the new
2023 guidance, but remain unconvinced the underlying business is as strong as
advertised. Raise PT to $120 from $115.

Key Points

COIN (Underperform, PT Unchanged at $30)

We sharpen our focus on the core business, which saw yet another Q/Q decline in
retail as a % of COIN's volume mix from 16% in 3Q to 14% in 4Q. This resulted
in a blended take rate decline from 23bps in 3Q to 22bps in 4Q. We believe the
take rate decline likely would have been more steep had COIN not benefited Dan Dolev
Managing Director
from unusually high intra-retail take rates, which were driven by a lower mix of
+1 646 949 9599
advanced trading volume. These volumes come at a lower fee rate vs. standard [email protected]
retail volumes, and declined in the mix in 4Q due to low crypto asset volatility
Ryan Coyne
in December and the migration of users from Coinbase Pro (lower take rate) to
Senior Associate
the advanced trading platform (higher take rate). +1 212 205 7975
COIN's 2023 adj. EBITDA guidance was vague, with management noting it [email protected]
expects an improvement vs. 2022 on an absolute dollar basis. While unclear Nicholas Lucas
whether they are guiding to adjusted profitability or not, we urge investors to be Associate
+1 212 282 3017
[email protected]

PLEASE REFER TO PAGE 6 OF THIS REPORT FOR IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION
INFORMATION. Mizuho Securities USA LLC does and seeks to do business with companies covered in its research reports.
As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.

Mizuho Securities USA LLC

www.mizuhosecurities.com/us
 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

mindful of the plethora of EBITDA add-backs (i.e. stock-based compensation,

which has grown to ~70% of total revenue).
Updating our model. Despite lower transaction revenue estimates, our 2023
EBITDA estimate increases slightly as a result of higher interest income and
higher-than-expected opex reductions; our 2024 EBITDA is largely unchanged.
Our PT remains $30. This is based on 9x our terminal EBITDA, a discount to
the group given our expectation for further pricing compression over time.

SQ (Neutral, PT $80 vs. $70 Prior)

SQ's 4Q was more organized and well-done than we had feared. It was nice to see
a formal, adjusted EBITDA guide for 2023. While we believe the story remains
complicated, management seems to be listening to investors, particularly those
that are looking to profits as the main KPI at this juncture.
We are adjusting our estimates as follows: For 1Q, we are raising our overall
SQ GP estimate to $1,682mn from $1,567mn previously. This implies +30% Y/
Y all-in growth (vs. the January & February run-rate of +33%). We then apply
management's 1Q non-GAAP operating expense guide of $1,430mn, which
results in an increase to our 1Q adjusted EBITDA estimate to $252mn vs.
$235mn prior.
We make the following changes to our ecosystem outlooks:
■
Cash App: Management guided to +50% Y/Y growth on a reported basis in
January & February, with a slowdown in March (e.g. lapping price increases).
We had previously assumed +39% growth for 1Q. Given management's
comments, we are raising our all-in Cash App growth to +47% for 1Q, helped
by strong Cash Card performance and a boost in payday lending, which we
would like to further investigate.

■
Square: The $703mn of Square GP ex. BNPL was exactly in-line with our
expectations. However, on a total Square basis, we underestimated Afterpay's
contribution ($98mn vs. our $75mn estimate). For 1Q, management alluded
to +15% Y/Y growth on a reported basis in January & February. We now
model this run-rate for the full quarter. Our total 1Q Square GP increases to
$763mn vs. $702mn prior.

For the FY, we are raising our adjusted EBITDA estimate to be in-line with
management's $1.3bn guide (vs. $1.1bn prior). Our overall GP estimate also
increases, driven by higher estimates in each ecosystem.
We now value SQ at 16x our terminal margin EBITDA (vs. 15x prior due to
better profitability outlook), which implies a PT of $80 (vs. $70 prior).

GPN (Neutral, PT $120 vs. $115 Prior)

GPN recently reported 4Q earnings. Results were OK, but the guide was
confusing. We were surprised to see that EVO was included in the 2023 guidance
despite the acquisition not having closed yet. This is highly unusual.
Regardless, we are roughly aligning our 2023 expectations with management's
guidance: revenue at $8.576bn vs. $8.575-8.675bn guide, and EPS at $10.27 vs.
$10.25-10.37 guide. Our 2024 revenue and EPS move up slightly.
We continue to value GPN at 11x our 2024E EPS estimate, which implies a PT
of $120 (vs. $115 prior).

February 24, 2023 Mizuho Securities USA LLC 2

 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

COIN Model

COIN: Annual Income Statement FY 2019 - 2024E ($mns)

FY19 FY20 FY21 FY22 FY23 E FY24 E

Transaction Revenue 463 1,096 6,837 2,356 1,115 1,201

% Growth 137% 524% -66% -53% 8%

Interest Income n/m 6 26 327 855 800

% Growth n/m 369% 1167% 161% -6%

Other S&S Revenue 20 39 492 466 396 396

% Growth 98% 1145% -5% -15% 0%

Total Revenue 534 1,277 7,839 3,194 2,447 2,478

% Growth 139% 514% -59% -23% 1%

Operating Expenses 580 869 4,763 5,904 3,951 3,593

as % of Total Revenue 109% 68% 61% 185% 161% 145%

Operating Income (46) 409 3,077 (2,710) (1,504) (1,115)

% Margin -8.6% 32.0% 39.2% -84.8% -61.5% -45.0%

Pretax Income (45) 409 3,027 (3,065) (1,580) (1,191)

Tax Expense (15) 87 (597) (440) (348) (262)
% Rate 33% 21% -20% 14% 22% 22%

Net Income (30) 322 3,624 (2,625) (1,233) (929)

Adj. EBITDA 24 527 4,090 (371) (22) 361

% Margin 4.5% 41.3% 52.2% -11.6% -0.9% 14.6%

Sources: Company reports, MSUSA research.

February 24, 2023 Mizuho Securities USA LLC 3

 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

SQ Model

SQ Select Financial Data (FY20 - FY24E)

$ in millions 2020 2021 2022 2023E 2024E

Core Square (Seller) Gross Profit 1,508 2,317 2,707 3,060 3,267
% Y/Y Growth 54% 17% 13% 7%

Core Cash App Gross Profit 1,226 2,071 2,657 3,504 4,103
% Y/Y Growth 69% 28% 32% 17%

Core SQ Gross Profit 2,733 4,388 5,364 6,564 7,370

% Y/Y Growth 61% 22% 22% 12%

Afterpay Gross Profit 588 780 851

% Y/Y Growth 33% 9%

Total Gross Profit 2,733 4,388 5,952 7,344 8,221

% Y/Y Growth 61% 36% 23% 12%

Adj. EBITDA 474 1,014 991 1,300 1,513

% Y/Y Growth 114% -2% 31% 16%
% Margin (as % of GP) 17.3% 23.1% 16.6% 17.7% 18.4%

Sources: Company reports, MSUSA research.

GPN Model

Global Payments (GPN) - Selected Annual Financial Information

$mns, except per share data FY 2019 FY 2020 FY 2021 FY 2022 FY 2023E FY 2024E

Merchant Solutions Revenue 4,594 4,245 5,136 5,631 6,109 7,078

% Growth -8% 21% 10% 8% 16%
Issuer Solutions Revenue 1,780 1,747 1,906 1,943 1,977 2,051
% Growth -2% 9% 2% 2% 4%
Bus. and Consumer Solutions Rev. 805 830 784 610 115 0
% Growth 3% -6% -22% -81% -100%
Intercompany Eliminations (59) (73) (88) (92) (100) (112)

Total non-GAAP Revenue 7,120 6,748 7,738 8,092 8,576 9,176

% Growth -5% 15% 5% 6% 7%

Adjusted Op. Income 2,676 2,681 3,234 3,534 3,814 4,219

Adjusted margin 38% 40% 42% 44% 44% 46%

Adjusted Earnings 1,239 1,922 2,396 2,569 2,738 3,098

Adjusted EPS $6.22 $6.40 $8.16 $9.32 $10.27 $11.52

Adjusted Free Cash Flow 1,094 2,048 2,497 2,278 2,534 2,758
Free Cash Flow Conversion 88% 107% 104% 89% 93% 89%

Sources: Company reports, MSUSA research.

February 24, 2023 Mizuho Securities USA LLC 4

 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

Price Target Calculation and Key Risks

Block Inc.
We value SQ at 16x estimated terminal EBITDA. At an est. $9.5-10bn of adj. net
revenue in 2024 and terminal EBITDA margin of 30% (based on 40% at Square, 20%
at Cash App, and 25% at Afterpay), this implies terminal EBITDA of $3bn. At 16x,
this implies a PT of $80.
Downside risks include: (1) inability to further evolve sustainable revenue streams
for the Cash App, (2) key end markets seeing post-COVID structural decline, and (3)
inability to innovate on par with other disruptors in the industry. Upside risks include:
(1) Better than expected growth in new Cash App products. (2) Successful move into
enterprise in Seller. (3) Successful integration of the combined businesses including
Cash App, Seller and BNPL into one closed-loop ecosystem.

Coinbase Global, Inc.

We measure COIN against the disruptor fintech group at an estimated terminal margin
EBITDA. We assign a 30% terminal margin (slightly below peak 2020-2021 levels but
well above more steady state 2019 levels) to our 2024 net revenue estimate and apply
a 9x EV/terminal EBITDA multiple, a discount to the peer group given the outlook for
pricing compression over time. This implies a PT of $30.
Upside risks include: Bitcoin price appreciation, crypto asset market volatility,
and success of new revenue sources such as institutional transaction revenue and
subscription and services.

Global Payments Inc.

Although GPN's issuer processing business is best-in-class, it also faces emerging
disruption from tech entrants with bank consolidation acting as a headwind. In
acquiring, we view GPN's high exposure to T&E in its legacy business as a potential
hurdle to growth. Our $120 PT is based on 11x our 2024E EPS forecast.
Key upside risks include: (1) better-than-expected growth in the merchant acquiring
business, (2) significant wins in the issuer processing business, and (3) stronger-
than-expected international growth. Key downside risks include: (1) intensifying
competition from technologically superior solutions in merchant acquiring, (2) prepaid
business (NetSpend) facing significant disruption from interlopers such as Cash App,
and (3) M&A integration.

February 24, 2023 Mizuho Securities USA LLC 5

 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

IMPORTANT DISCLOSURES
The disclosures for the subject companies of this report as well as the disclosures for Mizuho Securities USA LLC entire coverage universe can be found
at https://msusa.bluematrix.com/sellside/Disclosures.action or obtained by contacting [email protected] or via postal mail
at Equity Research Editorial Department, Mizuho Securities USA LLC, 1271 Avenue of the Americas, 2nd FL, New York NY, 10020.
Investment Risks and Valuation Methods can be located in the following section of this research report - Price Target Calculation and Key Risks.

Receipt of Compensation
Mizuho Securities USA LLC and or its affiliates makes a market in the following securities: Coinbase Global, Inc. and Block Inc.
The compensation of the research analyst writing this report, in whole or part, is based on MSUSA's annual revenue and earnings and is not directly related
to any specific investment banking compensation. MSUSA's internal policies and procedures prohibit research analysts from receiving compensation
from companies covered in the research reports.

Regulation Analyst Certification (AC)

I, Dan Dolev, hereby certify that the views expressed in this research report accurately reflect my personal views about any and all the subject companies.
No part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Rating Definitions
Mizuho Securities USA investment ratings are based on the following definitions: Anticipated share price change is based on a 12-month time frame.
Return expectation is based on the stock’s total return. For disclosure purposes (for purposes of the FINRA requirements), we include the category
headings of Buy, Hold, and Sell alongside our ratings of Buy, Neutral, and Underperform.
Buy: Stock's total return is expected to appreciate above the average total return of the analyst's industry coverage universe, on a risk-adjusted basis,
over the next 12 months.
Neutral: Stock's total return is expected to be within the average total return of the analyst's industry coverage universe, on a risk-adjusted basis, over
the next 12 months.
Underperform: Stock's total return is expected to depreciate below the average total return of the analyst's industry coverage universe, on a riskadjusted
basis, over the next 12 months.
RS: Rating Suspended - rating and price objective temporarily suspended.
NR: No Rating - not covered, and therefore not assigned a rating.

Rating Distribution
(As of February 23 ) % of coverage IB service past 12 mo
Buy (Buy) 58.15% 58.58%
Hold (Neutral) 39.17% 52.80%
Sell (Underperform) 2.68% 9.09%

For disclosure purposes only (NYSE and FINRA ratings distribution requirements), our Buy, Neutral and Underperform ratings are displayed as Buy, Hold and Sell,
respectively.

Rating and Price Target History for: Coinbase Global, Inc. (COIN) as of 02-23-2023
04/21/21 05/04/21 05/25/21 07/30/21 08/18/21 10/20/21 01/25/22 04/05/22 04/12/22 05/04/22 05/12/22 06/14/22 07/14/22 12/09/22
I:N:$285.0 N:$315.0 N:$225.0 N:$210.0 N:$220.0 N:$300.0 N:$220.0 N:$190.0 N:$150.0 N:$135.0 N:$60.0 N:$45.0 N:$42.0 UP:$30.0
400
350
300
250
200
150
100
50
0
Q1 Q2 Q3 2021 Q1 Q2 Q3 2022 Q1 Q2 Q3 2023

Created by: BlueMatrix

February 24, 2023 Mizuho Securities USA LLC 6

 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

Rating and Price Target History for: Block Inc. (SQ) as of 02-23-2023
08/26/20 11/19/20 02/22/21 12/14/21 01/25/22 03/11/22 03/22/22 03/29/22 05/12/22 08/05/22 09/22/22 11/16/22 12/12/22
I:B:$225.0 B:$300.0 B:$380.0 B:$285.0 B:$210.0 B:$180.0 B:$190.0 B:$215.0 B:$135.0 B:$125.0 N:$57.0 N:$69.0 N:$70.0
300
250
200
150
100
50
0
Q1 Q2 Q3 2021 Q1 Q2 Q3 2022 Q1 Q2 Q3 2023

Created by: BlueMatrix

Rating and Price Target History for: Global Payments Inc. (GPN) as of 02-23-2023
08/26/20 03/23/21 08/06/21 11/03/21 05/03/22 08/03/22 12/12/22
I:N:$165.0 N:$190.0 N:$180.0 N:$155.0 N:$148.0 N:$132.0 N:$115.0
240
220
200
180
160
140
120
100
80
Q1 Q2 Q3 2021 Q1 Q2 Q3 2022 Q1 Q2 Q3 2023

Created by: BlueMatrix

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 SQ: We Applaud Strong EBITDA; COIN: More of the Same; GPN: Confusing Guide

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