Square (NYSE:SQ) enters its first-quarter earnings call next week in an interesting position for SQ stock.
As a payment processor, Square is one of those companies that will be most affected by the downturn of mom-and-pop businesses, food trucks and other small companies that are hurting from the novel coronavirus.
But when you look at the big picture, you see that SQ stock is perfectly positioned for the inevitable recovery, and that the company’s two-pronged business plan is ideal for the 21st century.
Square is scheduled to report earnings on May 6. Let’s take a closer look at this innovative payment processor.
SQ Stock at a Glance
At one point this February, Square was flying high, up more than 35%. Then the U.S. started getting confirmed coronavirus cases and businesses began shutting down as social distancing became the norm. Suddenly Square was looking at a 40% loss.
Fortunately for investors, those peaks and valleys are starting to balance out. SQ is up about 1% year-to-date.
Fourth-quarter earnings released in February were a big winner, with adjusted earnings up 64% to 23 cents per share, versus 14 cents per share a year ago. Analysts had expected EPS of 21 cents.
Net revenue was $1.31 billion, an year-over-year increase of 41% from the $933 million SQ recorded a year ago. The company’s revenue also beat what analysts’ projected, which was $1.186 billion.
Square issued rosy 2020 guidance of revenue between $5.9 billion and $5.96 billion, with adjusted EBITDA between $500 million and $520 million. Both of those also beat analysts’ forecasts of $5.61 billion revenue and adjusted EBITDA of $539.4 million.
All that was great. Then the coronavirus happened.
Square and the Coronavirus
Square is known for its (not coincidentally) plastic square dongles that are designed to fit neatly in a smartphone or tablet, turning them instantly into a payment processor that can handle most major credit cards.
It’s the perfect 21st-century solution to anyone running a business, including pop-up stores, landscaping, food trucks, or small companies. According to a survey from the National Federation of Independent Business, the pandemic has hurt nearly 75% of small businesses.
In the fourth quarter, 45% of Square’s overall volume came from businesses with less than $125,000 annualized gross payment volume. So Square is going to be disproportionately injured by any event that hurts small business.
Raymond James analyst John Davis cut his rating on SQ stock from “market perform” to “underperform” in mid-April, noting that payment volumes could be down as much as 60%.
Because of the coronavirus, last month Square revised its first-quarter guidance, adjusting it downward to a net revenue range of $1.3 billion to $1.34 billion. Profits are expected in the range of $515 million to $525 million.
The company also said it expects to report an EPS loss for the first quarter, and withdrew its 2020 full-year guidance.
Analysts will be watching Square closely when it steps up to the earnings microphone on May 6. But even as numbers are destined to disappoint in the short-term, SQ can still be a solid company headed into the second half of 2020.
SQ Does Fintech the Right Way
Square’s point-of-sale payment processing system is just one way it makes money. There’s also the Square Cash app, which is a direct competitor to PayPal (NASDAQ:PYPL) and is seeing fast growth of its own.
Square Cash allows people to transfer money via their smartphones. At the end of 2019 Square Cash had 24 million active users, compared to PayPal’s 52 million active users of the Venmo app.
Square Cash also features the Cash Card, which works like a debit card and allows customers to invest in anything from stocks to bitcoin.
The Square Cash app represented more than $450 million of SQ’s $1.4 billion in revenue in 2019, but company officials think that’s just the tip of the iceberg. According to an investor presentation, SQ believes Square Cash is tapping into a $60 trillion market, and is just scratching the surface with a 2% penetration so far.
The Bottom Line on Square Stock
Square stock was growing fast before the coronavirus, but it’s also ideally situated to help small businesses recover as the virus begins to fade away.
Already, the stock is beginning its long climb higher, and while first-quarter earnings will be a disappointment, I’ll be more interested in hearing about Square’s forecast for the second half of the year.
SQ stock has a “B” rating today in my Portfolio Grader.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.