On Tuesday evening, well after the markets closed, Square (NYSE:SQ) began to rip higher. Investors were asking, “What’s going on? Why is SQ stock up 10% right now?” Earnings weren’t supposed to be until Wednesday. But the results surprisingly hit the wire that night.
In any regard, the results sent shares higher by 12% in midday Wednesday trading. The bullish response comes after a top- and bottom-line earnings beat.
Earnings of 18 cents per share came in 22 cents ahead of expectations, as analysts were expecting a loss in the quarter. Revenue accelerated 64.1% year-over-year to $1.92 billion. This figure coasted past estimates, with analysts caught off-guard as much by the strength of the report as they were by the timing of the release.
I love SQ stock and have for quite some time, but not everything is what it seems like in this report.
Breaking Down Square’s Earnings
The headline numbers are great and so were the numbers from its Cash App. In my opinion, this is where SQ stock is now getting its premium valuation. For years it was simply growth, as small- and medium-sized businesses switched to a more convenient payment terminal. Now it is Cash App that’s driving the growth.
However, that’s also where I’m running into issues.
Anyone who has read my work knows that I love making plays on the future. I like tech, cryptocurrency, cannabis and digitalization, among other things. Square is a great combination of those things, as it’s a tech play in the payments industry and has exposure to cryptos via its Cash App.
In the company’s shareholder letter, management said:
“In the second quarter of 2020, total net revenue was $1.92 billion, up 64% year over year, and excluding bitcoin revenue, total net revenue was $1.05 billion, flat year over year.”
So that tells us the core business struggled for growth, but bitcoin (CCC:BTC) seemingly saved the day as far as revenue goes. That said, despite $875 million in bitcoin revenue, the company generated just $17 million in gross profit from those transactions. That equates to a gross margin of 1.9% — hardly something to cheer over.
I am not trying to rain on bulls’ parade here. Clearly there is momentum and opportunity in digital payment companies like Square, PayPal (NASDAQ:PYPL) and others. That shift is secular to begin with and now it’s being accelerated by the novel coronavirus.
However, the bitcoin revenue seems more like a pass-through recording than a true sale figure. That’s my biggest gripe, although one could argue that the bitcoin transactions make Square’s Cash App stickier and will help retain customers in the future.
Trading SQ Stock
Don’t get me wrong. As I have said before, I love technology and bitcoin — and I love SQ stock. But it should be pointed out that while revenue seems to be soaring, it’s not making it to the bottom line.
That said, price action speaks louder than anything and to that extent, the bulls keep on winning.
This is a super long and a very beautiful trend that SQ stock is riding. The stock continued to ride the rising 20-day moving average, before poking out over $135 resistance ahead of earnings. The surprise announcement caused shares to burst higher, as the gap-up cleared the two-times range extension near $142.
Now in the $150 range and being rejected by $160 (for now), let’s see how SQ stock trades from here. I would love a dip back into the $135 to $140 area and a test of the 20-day moving average. That could be an excellent buy-the-dip opportunity.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.