Recently, PayPal (NASDAQ:PYPL) announced a blowout earnings report. Following that, PayPal stock spiked to new all-time highs. It’s left traders wondering who would be next. Square (NYSE:SQ) is one of the most likely candidates. Like PayPal, Square stock has gone aggressively into the crypto space.
Thus, it’s worth taking a look at Square stock in light of PayPal’s massive earnings report. To be clear, this is not a long-term call on Square. I’m quite bearish on the firm on a multi-year basis. However, for the next month or so, Square stock should keep moving higher. Here’s why.
PayPal Sets The Tone
Last Wednesday, PayPal delivered a gigantic earnings report. The company’s non-GAAP EPS came in at $1.08, well ahead of the $1 expectations. Revenues easily topped the consensus and grew at more than 23% year-over-year. PayPal is now growing at its fastest rate since 2017. For a company already as large as PayPal is, that’s an impressive achievement.
Here’s where Square investors should really pay close attention. PayPal reported a massive increase in activity on its Bitcoin (CCC:BTC-USD) trading platform. Furthermore, PayPal’s “buy now, pay later” Bitcoin offering is off to a strong start. Analysts cheered the results and pointed to PayPal’s progress in becoming an all-in-one app spanning shopping, payments, and financial services for their success.
That’s ultimately a threat to Square, as it wants to win the space with its own Cash App. In the short-term, however, the market is large enough for two major players. PayPal’s strong numbers — particularly in relation to its various Bitcoin offerings — is a great data point for Square as well. Square has earnings coming up. Traders have some time to extrapolate from PayPal’s earnings release and imagine how well Square’s numbers for the same period will look.
Crypto Has Been On Fire
It’s important to remember that quarterly earnings have a delayed time effect. A company doesn’t immediately report earnings. Rather, it takes time to collect and then double-check the results.
For Square, the Q4 earnings report coming up will reflect the results of operations from Oct. 1, 2020 to Dec. 31, 2020. At the start of that time period, Bitcoin was trading for $10,600. Bitcoin ended the quarter at around $29,000. Thus, this quarter’s earnings will reflect the majority of the overall surge in Bitcoin.
As a result, Square’s crypto trading revenues should be through the roof for Q4, as this quarter captures a large chunk of the recent run. It’s important to remember that Square books all its crypto transactions as revenues. If a client buys $1,000 of Bitcoin, for example, Square gets to report that as revenue, even though it only keeps a small portion of that as profit. Regardless, to the extent that traders only care about revenues and price/sales multiples, Square is set to shine this quarter as it profits from peak crypto enthusiasm.
There is one downside of this quarterly timing effect, though. The recent Robinhood trading freeze in Reddit stocks occurred in Q1 of 2021 as opposed to Q4 of 2020. So all those trader defections from Robinhood to Cash App aren’t going to show up in this upcoming earnings report. If you see any weakness on the brokerage front, that’s why.
On the other hand, those ex-Robinhood customers will give a boost to Square’s results for Q1 2021, giving an additional catalyst for the stock going forward.
Square Stock Verdict
I’m not bullish on SQ stock for the long run. I made my case against Square in great detail recently. The company’s core payments platform has stagnated and its attempts at other innovations have been fairly hit or miss up to this point. I also don’t have great confidence in Jack Dorsey as the CEO.
That said, purely as a trade, there’s a case for more near-term upside in Square stock. That PayPal earnings report was excellent. Traders are likely to bid up Square stock into its own earnings report in anticipation of a similar outcome. As a reminder, Square’s Bitcoin revenues aren’t worth a whole lot to shareholders, given the anemic profit margins that the company earns on them.
But in this market, people aren’t asking too many questions. As long as Square beats the numbers, the stock probably trades higher. With Bitcoin having an absolutely monster run recently, there’s every reason to expect Square will put up a big, top-line number on its earnings report. PayPal already nailed its earnings release, in part due to crypto excitement. Square stock could easily follow that lead. Just keep an eye on the exits; Square’s long-term fundamentals remain awfully thin. This is a momentum trade into earnings. That said, it’s a pretty good set-up on that basis.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.