SQ stock surged some 248% 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.
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.
Square fourth-quarter earnings are due on Feb. 23. Bitcoin volatility looms over Square stock when it reports earnings and revenue.
Square in early October said it had purchased about $50 million in Bitcoin, then priced at $10,618. Square stock hit an all-time high of 259.97 on Feb. 8 as Bitcoin hit $48,000 amid Tesla‘s (TSLA) $1.5 billion investment in the cryptocurrency.
Cash App users are able to buy, hold and sell Bitcoin. Further, bitcoin transactions have sent Square’s revenue soaring.
But Square’s Bitcoin business has gross profit margins of only around 2%, analysts say. Meanwhile, given a lack of transparency over the volume of Bitcoin transactions in any given quarter, there’s a wide range of revenue estimates from Wall Street analysts.
Most analysts now focus on Square’s “gross profit” as a key financial metric. In the December quarter, analysts estimate gross profit of $801 million.
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.
SQ Stock: Payments Ecosystem
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 Jack Dorsey. The CEO-sharing arrangement has seemingly worked out for Square stock.
Under Dorsey, Square has dabbled in cryptocurrency bitcoin. Bitcoin’s price has hit new highs in early 2021 amid much volatility.
With roots in serving such micromerchants 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 18 said it received conditional approval to operate as an industrial loan bank charter. A new unit, Square Financial Services, is expected to launch in 2021. It’ll make small business loans to merchants that use Square payment devices.
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
Square third-quarter earnings came in at an adjusted 34 cents per share, up 36% from the year-earlier period. Gross profit increased 59% to $794 million vs. estimates of $707 million.
Square said net revenue jumped 140% to 3.03 billion as more Cash App users bought and sold digital cryptocurrency bitcoin. Bitcoin transactions brought in $1.63 billion in revenue. Excluding bitcoin transactions, revenue rose 25% to $1.4 billion. The low-margin bitcoin transactions produced $32 million in gross profit.
Without bitcoin, Cash App revenue was $435 million, up 174% year over year. Most growth came from Instant deposit and debit card services.
“Square’s Cash App is quickly solidifying its position not only as a personal finance/banking app, but is blazing forward in monetization as well,” said Canaacord Genuity analyst Joseph Vafi in a report.
However, Square did not update how many Cash App active customers there are. It had 30 million active customers as of the June quarter. Subscription and services-based revenue in the quarter climbed 60% to $448 million vs. estimates of $398.5 million.
Square said GPV from merchant customers rose 9% to 31.7 billion. Analysts projected GPV of $30 billion amid Square’s exposure to restaurants and small businesses. With plenty cash on its balance sheet, Square could make acquisitions.
Bloomberg in December reported that Square has held talks to acquire Jay-Z’s Tidal streaming music service.
SQ Stock Technical Analysis
After its disappointing initial public offering in November 2015, Square (SQ) stock meandered. In June 2016, SQ stock still traded just above its IPO 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 and gradually rose into this year before the coronavirus pandemic hit.
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 B. 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.
Square stock plunged in March 2020 amid the coronavirus lockdown. SQ stock clawed back, and forged a proper entry point of 87.35.
Square stock hit an all-time intraday high of 246.49 on Jan. 8. Shares in the digital payment processor pulled back a bit amid volatility in Bitcoin trading. But as of Feb. 8, SQ stock had moved above its 10-week moving average, a bullish signal.
For now, SQ stock is not a buy. One wild card is whether Square stock provides 2021 guidance on Feb. 23.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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