Being a high-growth company can be very expensive.Just look at Square Inc (NYSE:SQ). During the latest quarter, the company boosted its operating expenses by a hefty 47%. The company has been aggressive with its R&D and marketing expenditures.
But the strategy seems to be OK with investors. On the heels of the first-quarter report, SQ stock is only off about 2.5% to $47. This is not bad, given that the equities markets were down big Thursday.
Keep in mind that SQ stock has had a pretty good year so far any way. Note that the return is about 39%. In fact, SQ stock is up a sizzling 159% for the past 12 months.
Here’s a further look at the quarter: Revenues spiked by 51% to $307, whereas the Street was looking for $293 million. The earnings were in-line with expectations at 6 cents a share.
For the current quarter, Square projects revenues of $355 million to $360 million, up from the consensus of $344 million. Although, earnings will likely be on the light side, Square forecasts that they will be 9 to 11 cents per share. The Street, on the other hand, was looking for 12 cents per share.
Here are some other notable events of the quarter:
- Square launched its fastest growing products — Instant Deposit and Cash App – in the U.K. For the most part, the market is ideal. There are similar business approaches and systems. Of course, there are no language barriers. And the market is significant, with 5.5 million SMBs (small and medium-size businesses). About half of them do not currently take credit cards.
- Square agreed to pay $365 million for Weebly, which is a platform that makes it easy to create professional websites. The service has more than 625,000 paid subscribers and nearly 40% are from outside the U.S.
- Square also acquired Zesty, which operates a catering system. Some of the tools include menu planning, order management, white-glove logistics and nutrition/allergen customization. Zesty will be folded into Square’s Cavier service.
- Square processed $17.8 billion in gross present value, up 31% on a year-over-year basis. A key factor has been the growth in the number of larger sellers.
Real Driver of SQ Stock
When it comes to SQ stock, a key attraction is bitcoin. But I think this misses the big picture. Bitcoin is highly volatile and may ultimately prove to be a dud. For example, during the latest quarter, Square generated a mere $200,000 in net transactions. In other words, it could take awhile for bitcoin to move the needle — if ever.
Rather, the big factor for SQ stock is the company’s aggressive push to create a digital ecosystem, which goes way beyond payments. The company has services for gift cards, appointments, payroll, employee management, inventory, customer engagement, location management and lending, just to name a few.
This approach allows for much more convenience, lower costs and better integration. Oh, and yes, SQ gets a bigger share of a customer’s wallet.
Bottom Line on Square Stock
I think the Weebly deal could prove to a strong growth driver. No doubt it will make a nice addition to the ecosystem. What’s more, the market for web development systems has been red-hot on Wall Street, as seen with companies like Shopify Inc (NYSE:SHOP), Godaddy Inc (NYSE:GDDY) and Wix.Com Ltd (NASDAQ:WIX). Consider that there are 30 million small businesses in the U.S. alone — and about 60% do not even have websites.
Now, it’s true that SQ stock is far from cheap, with the forward price-to-earnings multiple at 62X. But then again, in light of the strong growth and the powerful ecosystem, a premium is certainly well deserved.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
