Square SQ shares have tumbled over 20% since the firm reported its Q2 fiscal 2019 earnings results on Thursday, August 1. SQ stock continued to fall Monday, down 7%, as investors assess what’s next for the fintech firm amid its profitability struggles.
Now the question is should investors take advantage of Square’s post-earnings selloff and buy SQ stock as a way to play the overall expansion of the fintech universe from peer-to-peer payments to bitcoin?
Quick Q2 Overview
SQ’s adjusted second-quarter earnings soared 61.5% from the year-ago period to $0.21 a share, which beat our Zacks Consensus Estimate by 5 cents. Meanwhile, revenue surged 44% to $1.17 billion. This topped our $1.11 billion estimate and marked a 22.4% sequential expansion. And adjusted revenue climbed 46% to $563 million.
Despite the top and bottom-line beats, investors were disappointed by another GAAP loss. SQ’s $7 million loss in the second quarter came in worse than Q2 2018’s $6 million loss. The company also lowered its full-year outlook to a net loss between -$0.06 to -$0.10 a share, from its pervious -$0.05 to -$0.09 guidance.
The profitability concern is part of the reason why Square announced that it plans to sell its food-delivery platform Caviar to Uber Eats UBER competitor DoorDash for $410 million. “This transaction allows us to increase our focus on and investment in our two large, growing ecosystems—one for businesses and one for individuals,” the company wrote in prepared remarks. “It creates clarity in how we operate and a clearer purpose and alignment for our planning, investment, and work moving forward.”
Square was one of the vanguards of the fintech revolution back in 2009 when it launched its first credit card processor and software aimed to help micro-businesses and entrepreneurs adapt in an ever-more cashless society. Today, the San Francisco-based firm offers everything from business loans to P2P payment options and debit cards. Square’s core payment hardware and software offerings have also become more important in a digital-first world.
Plus, the firm’s more robust back-end infrastructure and wider array of product offerings have helped it become more attractive to larger businesses. In fact, lager sellers accounted for 54% of total gross payment volume in the second quarter, up from 50% in Q2 2018 and 46% in the second quarter of 2017. More specifically, sellers with GPV of $500K or more made up 26% of total volume, up from 22% in the year-ago period.
On top of that, Square’s overall GPV jumped 25% from $21.4 billion in Q2 2018 to $26.8 billion. The Cash App’s expansion as part of the broader P2P payment revolution has helped drive some of this expansion. The Cash App, which competes against PayPal’s PYPL Venmo and offerings from the likes of JP Morgan JPM, pulled in $260 million in total revenue. The platform allows people to digitally transfer money to friends and family and last reported over 15 million users.
The firm also noted that 3.5 million customers used its Cash App-based debit card, known as the Cash Card, to buy everything from groceries to gas. The Cash App’s revenue has skyrocketed from approximately $1 million in the second quarter of 2016 to $135 million, excluding bitcoin, in the recently-reported quarter. Investors should know that SQ CEO Jack Dorsey, who also runs Twitter TWTR, is a big believer in bitcoin, which means cryptocurrency could play a larger role at Square in the future as tech titans such as Facebook FB try to expand their payment offerings.
On top of P2P, bitcoin, and hardware sales, Square Capital facilitated approximately 78,000 loans during the quarter that totaled $528 million. This marked a 36% expansion from the year-ago quarter and helped bring its total to 800,000 loans, totaling roughly $5 billion, since Square Capital launched in May 2014.
Square’s top-line growth has helped SQ stock skyrocket roughly 390% since it went public in late 2015. The firm posted 49% revenue growth in 2018 and roughly 30% in 2017. In 2016, its first full year as a public company, SQ’s revenue climbed 35% to reach $1.71 billion. With that said, some of the recent narrative surrounding Square is that its growth days are in the rearview, but that is not necessarily the case.
Our current Zacks Consensus Estimates call for the company’s Q3 revenue to surge 33.5% to hit $1.18 billion. Meanwhile, its full-year fiscal 2019 revenue is projected to climb 35.5% to reach $4.47 billion. Peeking even further down the road, Square’s fiscal 2020 revenue is expected to jump over 28% above our 2019 estimate to reach $5.74 billion. Therefore, we can see that the fintech firm’s top-line outlook would see it stay within its impressive 2017 to 2016 ranges.
At the bottom end of the income statement, the firm’s adjusted third-quarter earnings are projected to soar over 69% to reach $0.22 a share. SQ’s full-year 2019 EPS figure is then expected to jump nearly 62% to hit $0.76 per share, with 2020’s EPS projected to come in 44% higher.
SQ stock closed regular trading hours Monday down 6.82% to $64.85 a share, on far greater than average trading volume. Shares of Square now rest roughly 36% below their 52-week highs of $101.15 a share. Therefore, with its expansion prospects in mind, especially within the larger digital financial revolution, investors might consider scooping up SQ stock as a growth-focused tech play.
Square is a Zack Ranks #3 (Hold) at the moment that sports “A” grades for Growth and Momentum in our Style Scores system. However, it is likely wise to wait for SQ’s recent selloff to stop. This becomes even more paramount after all three major U.S. indexes posted massive one-day declines as trade war fears mount once again.
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