Square (NYSE:SQ), the high-tech provider of financial services, mobile payments and merchant services, has yet to see a recovery nearly a month after Q2 earnings caused SQ stock to tank. After dropping 14% in one day, Square stock continued its decline and has sputtered through August. SQ closed at $62.15 on Wednesday, eking out a 0.65% gain on the day, but it’s still down 23% since closing at $80.98 on Aug. 1 — hours before the company delivered those Q2 earnings numbers.
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The question many investors are asking is whether the performance of SQ through August means there is upside to the stock. Given the potential for growth and the fact that even at $80.98, Square stock was trading below its 2019 high of $82.28 and well below the $99.01 it hit last fall, it does seem that Square is currently a bargain.
The Market Really Didn’t Like Square’s Q2 Earnings
After the markets closed on Aug. 1, Square reported its Q2 earnings. The reaction was immediate, and it was ugly.
Adjusted revenue of $563 million and adjusted EPS of 21 cents both beat analyst expectations, but its net loss of $7 million (up from $6 million the previous year) was wider than expected, and the company issued guidance for weaker-than-expected Q3 earnings. Square also announced it was unloading its Caviar food delivery business, selling to DoorDash for $410 million so it can focus on its core businesses.
SQ stock closed on Aug. 1 at $80.98, dropped to $69.60 the next day and bottomed out at $61.55 two weeks later. Here we are at the end of August and SQ is at $62.15, a long way from recovery territory.
Other Issues Weighing on SQ
Market reaction to Square’s Q2 earnings report isn’t the only thing that may be weighing on investors. The company faces stiff competition on all fronts. PayPal’s (NASDAQ:PYPL) Venmo peer-to-peer payment app has 40 million users and processed $24 billion in payment volume during that company’s second quarter. In comparison, Square’s payment volume for all of its services combined in Q2 was $26.8 billion. Meanwhile, Shopify (NYSE:SHOP) launched an initiative earlier this year to take on Square directly with its own line of retail payment processing hardware for brick and mortar stores.
Then there’s the China factor. Square doesn’t do business in China and any impact on the cost of its hardware production is expected to be minimal. However, as the trade war with China escalates, it is raising concerns about the potential impact on the U.S. economy and consumer spending as products become more expensive. If consumers cut down on their spending as a result, that will have a negative impact on SQ’s payment processing business.
Q1 Earnings Response May Model What Happens for SQ Stock
If you look back to Square’s Q1 earnings, the market reaction was remarkably similar. SQ beat analyst expectations for revenue and EPS when it reported Q1 earnings on May 1. However a wider net loss and guidance that suggested a continued decline in growth resulted in Square stock immediately dropping 8%, and by mid-May it was off 15%. Sound familiar? SQ sputtered through the rest of the month and didn’t start to fully recover until early June. However, once investors gained confidence (or put the Q1 earnings report behind them) SQ stock was on a roll, climbing nearly 36% to hit $82.28 on July 12.
There’s nothing to say that Square stock will follow the same pattern this time around, but for those on the fence about a recovery, it shows recent precedent.
Bottom Line for Square Stock
August has been a tough month for Square stock. However, despite the challenges the company faces, odds are good that the negative reaction to those Q2 numbers will fade. If you have been considering an investment in SQ, that makes the current price attractive. Of the 29 analysts polled by Nasdaq, 12 have SQ stock rated as a Strong Buy (only one has it as a Sell) with a 12-month price target of $83.50, suggesting there is significant upside with the post-Q2 earnings recovery currently stalled.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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