Payments processor Square (NYSE:SQ) reported first quarter earnings in late May. Pretty much everyone thought the numbers were going to be awful and braced for a plunge in SQ stock.
After all, thanks to the novel coronavirus pandemic, the physical economy shut down across the globe in March and April, and Square makes a living off providing payment solutions for physical merchants — especially small ones, the sum of whom were hit really hard in March/April.
Here’s the kicker: Square’s first-quarter earnings weren’t awful. Instead, the numbers were pretty good. And SQ stock rallied big after the print to its highest levels since early March.
How is that possible? Because Square is an innovative, multi-faceted business that didn’t let the pandemic kick its teeth out. Instead, the company adapted, and came up with some winning solutions to help itself and its businesses weather the storm.
This storm will pass. When it does, Square will come out the other side a better company than it was coming into the crisis.
Needless to say, that means SQ stock will get back to its winning ways over the next few months. Patient long-term investors will be rewarded.
Strong Earnings and SQ Stock
Square’s first-quarter earnings report was surprisingly strong.
Sure, Square’s Gross Payment Volume (GPV) trends slowed meaningfully in March and throughout most of April as physical businesses closed and consumers stopped shopping. GPV rose just 14% in the quarter, versus 25%-plus growth rates in previous quarters.
But those depressed GPV trends picked up some steam in the last two weeks of April, with major declines starting to moderate amid gradual economic reopening. Such reopening efforts will accelerate in June and July. As they do, Square’s GPV trends will continue to improve.
In other words, it appears that the worst in terms of Covid-19 is over for Square.
Meanwhile, during the quarter, Square managed to leverage its various new but rapidly growing non-physical businesses to support strong growth.
Revenues in the quarter still rose 44% year-over-year, supported by record Cash App engagement growth as consumers pivoted towards peer-to-peer digital payments, a surge in Square Online Store payment volume, and increased bitcoin trading volume.
Those new digital businesses will remain on fire for the foreseeable future. Concurrently, Square’s core physical GPV trends will bounce-back. That’s a winning combination that should propel SQ stock higher for the foreseeable future.
A Long-Term Winning Stock
Zooming out, Square’s impressive resilience through the coronavirus storm underscores why SQ stock is a long-term winning investment.
First, the company is aligned with the resilient cash-to-alternative-payments transition. This transition is robust with such widespread momentum that it didn’t slow during Covid-19. If anything, it accelerated, as consumers ditched cash in favor of contactless payment methods.
This pivot away from cash will persist for the foreseeable future. So long as Square can remain an important player in facilitating this payments transition, the company should keep growing at a healthy pace.
Second, you have a relentlessly innovative management team that will keep Square relevant in the alternative payments technology world.
The track record speaks for itself. At first, this was just a company that built payment card processors. Since then, the company has built an entire payment technology ecosystem, on both the buyer and seller sides, and seems to be introducing a new product into that ecosystem every year.
In addition to payroll management software, eCommerce software, and Cash App, the latest and greatest Square product innovation is Online Checkout, an online checkout link that allows retailers to accept e-payments without having an online store (similar to a PayPal (NASDAQ:PYPL) rival).
Continued innovation in a hyper-growth market is what has powered 200% revenue growth and 400% share price gains for Square since 2017. It is also what will continue to power big revenue and share price growth for the foreseeable future.
Bottom Line on SQ Stock
Square stock is a long-term winner. Yes, the novel coronavirus pandemic was a serious near-term headwind. But Square leveraged innovation and its multi-faceted buyer and seller ecosystems to weather that storm with impressive resilience.
Now, it appears that the worst of the Covid-19 headwind is over. Going forward, the fundamentals and numbers will only get better. As they do get better, SQ stock will get back to its longer-term winning ways.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SQ.