U.S. Markets closed

Why Square Stock Jumped 11% in July

John Ballard, The Motley Fool

What happened

Shares of Square (NYSE: SQ) gained 10.86% in value last month, according to data provided by S&P Global Market Intelligence. The stock got a boost in early July after an analyst with Raymond James upgraded it from underperform to market perform. The analyst cited the growth opportunity with Square's new business card as one reason for the optimism.

However, the stock price gave back last month's gain after management's outlook came in short of analsyts' expectations. The company's second-quarter earnings report on Aug. 1 showed continued momentum across the business, but investors were looking for a better outlook on profitability. 

A man holding a mobile phone up to a Square digital scanner at checkout in a store.

IMAGE SOURCE: SQUARE.

So what

Market participants will sometimes view guidance that comes in lower than expectations as a sign that the business is losing momentum, but these near-term misses shouldn't concern investors with a long-term mindset.

There was a lot to like in Square's recent earnings report. Revenue increased by 44% year over year to $1.17 billion, and the Cash App continues to grow at breakneck speed with revenue reaching $135 million excluding bitcoin transactions. 

Square continues to invest heavily in new services, the Cash App, and international expansion to drive growth. These investments led to a net loss of $7 million on the bottom line, compared to a loss of $6 million in the year-ago quarter. For what it's worth, both revenue and non-GAAP earnings per share of $0.21 beat analysts' expectations for the quarter. 

Now what

As for third-quarter guidance, management is calling for adjusted earnings per share to come in between $0.18 and $0.20, compared to analysts' previous expectation for $0.22 per share. It can seem a little silly to sell a stock for things like this, but that's why it's important to not give in to the market's rashness, and stay focused on the long-term health of the business.

Management continues to see opportunity to invest for growth, which is why it announced the sale of the Caviar food-ordering service. This will allow management to focus even more on growing its core services for sellers and individuals. While the Cash App is starting to contribute meaningfully to the top line, there is still tremendous potential in Square's platform for merchants. CFO Amrita Ahuja said, "We continue to see strong returns on sales and marketing spend, and see further opportunity to invest in attractive returns in our seller ecosystem." 

The full-year outlook calls for revenue to be up 35% year over year at the midpoint of guidance, while adjusted earnings per share should increase by 57% to 66%.

More From The Motley Fool

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short September 2019 $70 puts on Square. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com