When you think of SQ stock, both the coronavirus pandemic and cryptocurrency Bitcoin quickly come to mind.
Square (SQ) reports June quarter earnings on Aug. 5.
Bitcoin hit an all-time high near $65,000 in April. At the time, Square stock traded near an all-time high. Bitcoin fell below $30,000 on July 20, off over 50% from its all-time high.
In a tweet on July 15, Square Chief Executive Jack Dorsey said the company will create a new business line to help developers build financial services products focused on Bitcoin.
Square is “building an open developer platform with the sole goal of making it easy to create non-custodial, permission-less, and decentralized financial services,” Dorsey tweeted.
When Square reported March-quarter earnings, net revenue and gross payment volume handily beat analyst estimates. The digital payment processor cautioned that government stimulus payments to consumers will wind down, slowing Square Cash App growth.
SQ stock surged in 2020 as investors focused on the growth of its consumer Cash App. They shrugged off worries over Square stock exposure to small businesses and restaurants that might close because of the coronavirus pandemic.
“Square’s business has been on a wild ride through the Covid-19 pandemic,” MoffettNathanson analyst Lisa Ellis said in a recent note to clients. “Mandatory business closures abruptly shuttered many of its core seller customers, triggering a dramatic drop in Square’s business, followed by an equally dramatic rebound.
Square Stock: Investments Hiked In 2021
“At the same time, the pandemic has turbo-charged the growth of Square’s wildly popular consumer Cash App business,” Ellis went on to say. “We believe Square will emerge from the crisis in a stronger competitive position, leveraging its strong balance sheet, differentiated product suite, innovative team and strong brand.”
Square plans to offer checking and savings accounts to Cash App users, according to a report.
Square has closed the acquisition of a majority stake in Jay Z’s Tidal music streaming service for $297 million in cash and stock.
“Margin expansion in 2021 will depend primarily on the strength of top-line growth as the company has signaled that it intends to invest heavily across its ecosystems in order to grow customer base, drive product adoption, and increase spending power,” said Deutsche Bank analyst Bryan Keane in a recent report. “SQ plans to invest $1 billion to $1.1 billion in non-GAAP operating expenses in 2021, representing a 50% year-over-year increase at the midpoint as investments across the Seller and Cash App
ecosystems for future growth are coupled with new investments in Tidal, which was not factored into the company’s prior expectations.”
With multiple products, SQ stock faces stiff competition in both consumer financial apps and the small business market. Analysts expect Square’s rivalry with PayPal Holdings (PYPL) to heat up in 2021 as they improve digital wallets.
SQ Stock: Doubling Down On Bitcoin
Square stock disclosed a new $170 million investment in Bitcoin in early 2021 on top of its $50 million purchase in October. Square reports Bitcoin holdings as unrealized gains on investments, and will be excluded from adjusted earnings, analysts say.
In a note, Baird analyst David Koning said Square could report an impairment loss on its Bitcoin investments in the June quarter.
Square Chief Executive Jack Dorsey recently said the company is interested in developing a Bitcoin hardware wallet.
SQ stock ended 2020 with 36 million Cash App users, up from 30 million at the end of June and 24 million in December 2019.
Square disclosed that 3 million Cash App users traded Bitcoin in 2020, with an additional 1 million trading Bitcoin in January 2021.
Cash App users are able to buy, hold and sell Bitcoin. Square’s adjusted revenue from Bitcoin are sales to app users, minus the cost of purchasing the digital currency.
But Square’s Bitcoin business has gross profit margins of only around 2%, analysts say.
SQ Stock: Payments Ecosystem
In its core business, Square aims to build a two-sided digital payments ecosystem, with products designed for both merchant sellers and consumer buyers. The Square Cash App helps individuals manage money.
For merchants, Square makes credit-card readers that plug into mobile devices. Its Square Capital division provides loans to sellers. While Square retains only 10% of Square Capital loans on its balance sheet, there’s still a risk of defaults.
Prior to the Covid-19 outbreak, analysts were divided on whether Square revenue growth would reaccelerate with margin improvement following a period of elevated investments. The Square Cash App, a peer-to-peer money-transfer service, competes with PayPal’s Venmo, Zelle and others.
Amid the coronavirus emergency, Cash App emerged as a digital alternative to traditional banks. Consumers used the Cash App’s direct-deposit feature to receive government stimulus payments, for example. But Cash App gross profit growth slowed over the summer, analysts say, as stimulus programs expired.
Square is testing a short-term borrowing feature for Cash App users. Square offers loans of $20 to $200. Cash App users are expected to pay pack the loans in four weeks, with interest.
Also, the Cash App provides a stock trading feature. Cash App offers a debit card through a deal with Marqeta.
The bearish view is that Cash App’s momentum proves transitory with low customer retention after the coronavirus pandemic eases.
The Square Cash app, Square Capital and Instant Deposit all contribute to the company’s subscription and services revenue. One key for Square is cross-selling more services to its existing pool of merchants, analysts say.
To broaden its consumer platform, Square plans to buy Credit Karma’s tax business for $50 million in cash. It’s a free service for consumers.
SQ Stock: Moving Upmarket To Bigger Sellers
The payment processor has the same chief executive as Twitter (TWTR) in Dorsey. The CEO-sharing arrangement has seemingly worked out for Square stock.
With roots in serving such micro-merchants as food trucks and farm-stand vendors, Square has moved “upmarket,” targeting larger businesses.
SQ stock ranks among the top 10 fintech companies. Bigger fintech companies include Visa (V), Mastercard (MA), PayPal, Fidelity National Information Services (FIS), Fiserv (FISV) and American Express (AXP).
In addition to selling credit-card readers, Square provides software for point-of-sale and back offices in order to manage inventory and other tasks.
Square recently focused on software products that can be used across many industries, such as invoicing, payroll and marketing. It also aims to integrate its payment tools into e-commerce platforms.
Instant Deposit Speeds Up Process
The company’s Square Instant Deposit allows merchants to immediately receive payments instead of waiting a few days for settlement.
Meanwhile, Square Card is a business prepaid debit card issued in partnership with Sutton Bank to small business owners on the Square platform.
Square on March 2 said its Utah-based industrial bank has launched services to small businesses. Called Square Financial Services, the bank will offer loans and deposit accounts.
In trying to move upmarket, Square takes on Worldpay and Global Payments (GPN).
Some fintech companies are merging, giving them greater scale vs. Square.
The company recently sold Caviar, a food ordering and delivery service, to DoorDash for $410 million.
One key question as competition heats up is the outlook for the gross payment volume — total volume of sales in dollars generated by merchant customers — also known as GPV. It’s a key financial metric for rivals like PayPal as well.
Square Stock Fundamental Analysis
Bitcoin transactions via the Cash App boosted Square’s first-quarter revenue. Square’s earnings were 41 cents per adjusted share, up from a 2-cent loss in the year-earlier period.
Gross profit increased 79% to $964 million vs. estimates of $827 million. Net revenue jumped 266% to $5.06 billion.
Excluding Bitcoin, revenue rose 44% to $1.55 billion. Analysts had projected 16-cent adjusted profit on net revenue of $3.36 billion, including Bitcoin transactions.
In a letter to shareholders, the company said: “In April, Cash App delivered strong gross profit growth year over year. As we lapped the government fund disbursements in mid-April of 2020, gross profit growth slowed year over year.”
Square said first-quarter gross payment volume, or GPV, from merchant customers rose 29% to $33.1 billion. Analysts projected GPV of $30.06 billion.
Adjusted earnings before interest, taxes, depreciation and amortization, known as EBITDA, boomed to $236 million from $9 million a year earlier. Analysts expected adjusted EBITDA of $107 million.
The digital payment processor has not provided 2021 financial guidance.
SQ Stock Technical Analysis
After its disappointing initial public offering in November 2015, Square stock meandered. In June 2016, SQ stock still traded just above its initial public offering price of 9.
That soon changed. From July 1, 2016, through a high of 101.50 set last Oct. 1, Square stock exploded nearly 995%. Its big run led one analyst to call Square the next FANG stock, joining the likes of Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet‘s (GOOGL) Google in stature.
Following its big run, Square stock fell more than 50% in late 2018 as many technology companies also crashed. SQ stock clawed back in 2019.
Square stock forged a proper entry point of 87.35 in early February, 2020 just before the coronavirus outbreak forced cities to shut down. Shares surged some 248% in 2020 as investors focused on the growth of its consumer Cash App.
Not many stocks roar back after a 50% correction. It takes time for them to digest gains and set up for another extended surge into new highs. Many never deliver a repeat performance such as SQ stock.
Even so, Square has wrestled with finding the right balance of revenue growth, investments and profitability.
Is Square Stock A Buy Right Now?
The relative strength line, the blue line in the chart above, compares a stock’s price performance with that of the S&P 500. An upward-trending RS line tells you the stock is doing better than the general market.
SQ stock, meanwhile, has an Accumulation/Distribution Rating of D-plus. The rating runs from a best-possible A+ to a worst-possible E. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading. A falling Accumulation/Distribution Rating would be a sign that institutional buyers are exiting.
As of July 20, SQ stock trades below an entry point of 283.29. It has yet to form a new base, giving investors an opportunity to take a position.
For now, SQ stock is not a buy.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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