In late 2018, Square Inc (NYSE:SQ) saw its surging stock get flattened, falling over 35% from its all-time high of $101.15. Like many growth stocks, SQ stock bottomed out in December. However, despite delivering a favorable earnings report, the company’s stock has still found resistance at the $80 mark.
After a second-quarter earnings report, in which the company beat expectations for both revenue and EPS, the stock suffered a sharp sell-off.
So What’s the Story With Square?
One reason for SQ stock’s selloff was their announcement that it would sell off Caviar — its successful food service business unit. Depending on how you do the math, Square either sold Caviar for a tremendous profit, or a tremendous loss, but that’s just money.
This deal gives Square the opportunity to reach more customers. Because of Caviar, Square now processes about 25% of their revenue via food service. And the sale of Caviar integrates Square with DoorDash.
The bottom line for Square is that Caviar never seemed like a business they were in for the long haul.
How Is Square Expanding Its Ecosystem?
Despite selling off Caviar, Square is still very interested in expanding its reach beyond traditional payment processing.
The payment processing sector is becoming crowded. Competition will continue to increase as bigger companies seek to enter the space. Square is addressing this issue by building out add-on services such as inventory management, shipping, payroll and lending to make the cost of switching become higher for their existing customers.
This is consistent with Square’s stated desire to offer services that will allow them to compete with traditional banks. However, one of the most intriguing elements of Stock’s strategy to differentiate themselves from an increasingly competitive field has been their embrace of cryptocurrency, in particular bitcoin.
Square Is Making a Big Bet on Bitcoin
As businesses wrestle with their need to accept bitcoin as a form of payment, Square is clearly trying to establish a leadership position in this space. Investors may struggle to see the role a payment processing company like Square or PayPal (NASDAQ:PYPL) has in the crypto revolution.
After all, the whole point of cryptocurrency is its emphasis on security. But as Square’s CEO Jack Dorsey said in a 2018 interview, the internet is looking for a native currency to free it from the traditional regulatory and legislative restrictions that can slow down startup companies like Square.
The gamble seems to be paying off. In its second-quarter earnings report released on Aug. 1, Square reported its crypto-friendly Cash App made $125 million in revenue from bitcoin, a significant leap from the $65.5 million Square raised from bitcoin in Q1.
Not surprisingly, the increase in revenue led to a higher gross profit — to the tune of $2 million as opposed to $832,000 in Q1.
And other companies are taking steps to ensure they have a place at the table. Visa (NYSE:V) and PayPal are actively looking to partner with Facebook on its proposed Libra cryptocurrency.
SQ Stock Is Displaying Conflicting Fundamentals
A quick review of the fundamentals gives investors a picture of a stock that is sending mixed signals. On the one hand, SQ stock is up nearly 40% from its 52-week low of $49.82. On the other hand, the stock is down over 35% from its 52-week high of $101.15.
Square has also seen its consensus rating move from a Buy 30 days ago to a “hold” rating, and has seen its consensus price target dip from $86.80 to $84.69.
When you consider that Square is in an increasingly competitive space and has yet to turn a profit, you can understand why investors might be a little concerned about the company’s valuation.
What Direction Is SQ Stock Headed In?
After a favorable earnings report, SQ stock made a move last week that broke a trend of higher highs and higher lows. Some people may worry about how Square will protect its turf while expanding its customer base, particularly after the company abandoned Caviar which was, if nothing else, a cash cow.
However, as their Cash App (Square Cash) and other services move it into the individual financial services space, the company has a well-defined ecosystem that gives it the opportunity to reach businesses and customers.
In fact, the Cash App has exceeded expectations by growing from $1 million in quarterly revenue to $135 million in quarterly revenue over a three-year period and that doesn’t include bitcoin. And with a price target that is setting SQ stock up for a 30% increase from its current level, there looks to be tremendous upside.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
