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.
SQ stock has pulled back from an all-time high set on 283.18 on Feb. 16. After Square (SQ) announced the acquisition of a majority stake in Jay Z’s Tidal music streaming service for $297 million in cash and stock, shares retreated to 191.36. Since then, Square stock has clawed back a bit.
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.
Other rivals include First Data‘s (FDC) Clover unit, Shopify (SHOP), merchant acquirers, and well-funded startup Stripe.
Square’s December-quarter earnings topped estimates while net revenue and gross payment volume came in below expectations, despite Bitcoin transactions via the Cash App boosting the top line.
SQ Stock: CEO Jack Dorsey Doubles Down On Bitcoin
Square stock also disclosed a new $170 million investment in Bitcoin on top of its $50 million purchase in October. Bitcoin represents 5% of total company assets.
The new Bitcoin purchase reflects “management’s commitment to Bitcoin as the currency of the internet,” RBC Capital analyst Daniel Perlman said in a recent note to clients.
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.
However, Square stock stands to make a big profit on its $50 million purchase of Bitcoin in October, then priced at around $10,618. Bitcoin has traded above $50,000 recently amid the $1.5 billion investment by electric-car maker Tesla (TSLA) in the cryptocurrency. Square plans to report Bitcoin holdings as unrealized gains on investments, and will be excluded from adjusted earnings, 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 Jack Dorsey. The CEO-sharing arrangement has seemingly worked out for Square stock.
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 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
Square’s fourth-quarter earnings were 32 cents per adjusted share, up 39% from the year-earlier period. Gross profit increased 52% to $804 million, edging by estimates of $801 million.
Square said revenue jumped 141% to $3.16 billion as more Cash App users bought and sold digital cryptocurrency Bitcoin. Excluding Bitcoin, Square said fourth-quarter revenue rose 23% to $1.4 billion. Excluding Bitcoin, most Cash App growth came from Instant deposit and debit card services.
The company said subscription and services-based revenue climbed 60% to $449 million during the quarter, missing estimates of $458.6 million.
Square said gross payment volume, or GPV, from merchant customers rose 92% to $32 billion. Analysts projected GPV of $32.1 billion amid Square’s exposure to restaurants and small businesses.
Adjusted earnings before interest, taxes, depreciation and amortization, known as EBITDA, rose 57% to $185 million. Analysts expected adjusted EBITDA of 137.6 million.
As expected, Square didn’t provide 2021 financial guidance. Square said it expects to hike spending on sales and marketing and product development in 2021 by an incremental $850 million to $900 million.
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 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.
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.
MoffettNathanson analyst Lisa Ellis said in a recent note that Square stock “can grow gross profits at a more than 35% at a compound annual growth rate, and EBITDA at a nearly 50% CAGR, over the next three years.”
Is Square Stock A Buy Right Now?
Square’s Relative Strength Rating is 90 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an 80 or better RS Rating.
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-minus. 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 pulled back on its December-quarter earnings report. In addition, there’s an ongoing market rotation out of growth stocks.
As of April 7, SQ stock trades well 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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