Square (NYSE:SQ) looked like it was prepped for a bearish response to earnings. SQ stock originally fell 6% to 8% in after-hours trading when it released its first-quarter earnings.
However, shares turned around once investors digested the quarter and listened to the conference call. SQ stock climbed almost 10% in the first regular-hours trading session after the report. Now up 12.2% since reporting earnings, do investors still have a chance to buy Square?
This is a long-term play on multiple fronts. It’s a play on America, it’s a play on commerce and the transition from cash and check to credit and debit. It’s a play on money-sending and cryptocurrencies too.
In short, this isn’t a stock long-term investors should ignore.
On May 6th, Square reported a mixed quarter. While revenue of $1.38 billion jumped 43.9% year-over-year and beat estimates by $80 million, a loss of 2 cents per share missed analysts’ estimates by 15 cents.
From a bottom-line perspective, it was not a great quarter. However, for a quarter that accounted for stay-at-home orders in many markets, revenue was solid. With that said, it’s not hard to see why investors initially sold — rather than bought — SQ stock on these numbers.
Breaking Down SQ Stock
Once investors began digging through the numbers though, there was some positivity. First, gross profit jumped 36% to $539 million. Second, Square has plenty of liquidity. In the most recent quarter, long-term debt doubled to $2.1 billion. On the plus side though, current liabilities and non-current liabilities combined (~$4.2 billion) is still less than Square’s current assets of almost $4.4 billion.
Finally, the company’s Cash App is proving to be a real asset. Gross profit for the platform surged 115% year-over-year to $183 million. That figure represents just over one-third of Square’s total gross profit.
Cash App revenue of $528 million represented almost 40% of total revenue. Interestingly enough, bitcoin represented more than half of Cash App’s revenue, although just a fraction of its gross profit ($306 million and $7 million, respectively).
In short, the app is driving serious growth at Square, making the stock potentially undervalued as a long-term holding. It’s somewhat reminiscent of Apple (NASDAQ:AAPL) and its Services segment — albeit, on a much smaller scale.
Of course there are negatives, the main one being Square’s exposure to the novel coronavirus. According to management, “during the last two weeks of the quarter, our Seller ecosystem experienced a significant slowdown due to the impacts of COVID-19, with Seller GPV (Gross Payment Volume) down 35% year over year.”
Further, management explained that it expects a “material impact” to its second-quarter results. In response, they did not provide Q2 or FY guidance. As long as Covid-19 is impacting small and medium businesses, Square will be impacted too.
Sizing Up Square
Without guidance from management, it’s hard to form an accurate consensus. For now, analysts still expect revenue growth this year, with a 5% year-over-year bump. However, they are forecasting for a 34% drop in earnings.
That doesn’t stack up quite as well as the estimates for PayPal (NASDAQ:PYPL). PayPal just hit new all-time highs on solid results and is a name we like very much. As it stands, analysts expect moderate earnings growth of 4.5% this year on 12.3% revenue growth.
That’s much better than what we’re seeing at Square. However, SQ stock is forecast to have a much stronger rebound in earnings and revenue next year. Estimates stand at 85% and 32%, respectively. Unfortunately, it’s hard to put too much weight in 2021 estimates, simply because we don’t know how 2020 will shape up yet.
As for the chart, SQ stock has been consolidating for almost two years now. The $82.50 to $85 area has been a very notable ceiling in the stock price. If Square can clear this zone, it puts the 2020 high at $87.25 in play. That’s followed by the 2018 high near $100.
On the downside, see that SQ stock holds the 20-week and 50-week moving averages nears $66.50 to $67. Below puts the 200-week moving average back on the table.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.