Absent any background information, you’d think that Square (NYSE:SQ) would have converted any Wall Street naysayers. For its second quarter of 2019 earnings report, the payment-processing specialist did what they usually do: bring home an impressive beat. But this time around, Square stock tumbled badly, possibly leading many to question the bullish narrative.
But before we get into that, let’s take a brief look at the Q2 results. For per-share profitability, SQ delivered an earnings per share of 21 cents. This represented a 27.3% positive surprise from the consensus EPS target of 17 cents. In the year-ago quarter, the company registered earnings of 13 cents per share.
It was a similar situation with the revenue picture. Prior to the financial disclosure, consensus pegged adjusted top-line sales at $557.1 million. Actuals came in at $563 million, or a positive surprise of 1%. This haul also represented a 46% jump from the year-ago quarter.
Yet despite this apparently robust beat, SQ stock took a beating in the after-hours session, shedding nearly 7%. If you didn’t look at the fine print, you’ll have an obvious question: why?
First, I believe that investors took a dim view on Square’s same-day announcement that they’re selling food-delivery company Caviar to DoorDash for $410 million. For SQ, the deal involves a mix of cash and DoorDash preferred stock.
Second, the Street punished Square stock because of management’s downgraded expectations for Q3. Now, the company expects EPS to fall between 18 cents to 20 cents. Previously, covering analysts expected an EPS of 22 cents.
But do these reasons justify the extreme bearishness in SQ stock?
Markets Gifting Lower Prices for SQ Stock
When I look closely at the Q2 print, I can appreciate why some decided to drop out of Square stock. However, I also believe that the subsequent selloff was too extreme a response.
For instance, I’m not a big fan of management deciding to sell Caviar. In my view, Caviar will only increase in relevance as the on-demand and sharing economy increases in scope and influence. It’s no coincidence that when Uber (NYSE:UBER) conceptualized and dominated ride-sharing, they immediately shifted to food deliveries.
A quick personal anecdote: I’m usually a luddite regarding consumer trends. However, I’ve been converted big time to the on-demand economy. By selling Caviar, Square is giving up a lot of upside potential; hence, the volatility in SQ stock.
And no, I also didn’t like the downgraded EPS expectations for Q3. Further, management didn’t update its full-year guidance. Naturally, this could lead to negative speculation about SQ stock.
That said, I think stakeholders should take a deep breath.
In terms of total revenue, Square delivered $1.17 billion for Q2. This broke down into $776 million of transaction revenue and $251 million of subscriptions-and-services revenue. Admittedly, transactions fell short of expectations. That gave the bears fuel that a key component of Square’s business is slowing.
But that pessimism against SQ stock ignores that overall, growth is exploding higher. In 2017, year-over-year sales growth averaged 29%. Over the past four quarters (including Q2), this metric averaged 47%.
A slowdown? I don’t think so.
And while I don’t like the Caviar sale, management claims that they’re consolidating their various payments businesses. Long story short, they’re going to “participate in the economics” of food deliveries without actually owning such a direct service.
Don’t Be Myopic on Square Stock
Based on various analyst commentaries, I can’t help but think too many folks have tunnel vision regarding SQ stock.
Yes, most people arguably associate Square’s brand with the payment processing business. Thus, a less-than-anticipated transaction revenue is worrisome. But it’s only that way if Square was only focused on this sales channel. But Square stock has a much broader investment scope.
If you haven’t already done so, I highly recommend that you read the long-form analysis of Square stock that I wrote last month. For what it’s worth, this is the only article that I wrote where I received constructive criticism that didn’t involve violent threats or questions about my orientation. That must mean objectively, it’s a pretty solid write-up!
In all seriousness, though, SQ stock has so much going for it: a viable international growth plan, measured risks toward frontier markets (i.e., marijuana), and a dominant presence with small businesses. That’s the real story here, not this namby-pamby prosecution of every little headwind.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
