What will it take to get financial technology company Square’s (NYSE:SQ) stock moving in the right direction again?
The San Francisco-based digital payments company’s stock has been slumping since the start of August. At $196.90 a share, it is now down 37.98% from its 52-week high of $289.23 reached on Aug. 5. Year-to-date, SQ stock is down 10%, including a 23% decline in the past month.
The pullback has some analysts scratching their head as the payments company, whose Cash App is extremely popular with small businesses, was expected to outperform with the economic reopening this year and the return of in-person shopping. But with weakness in the share price persisting, many people on Wall Street are wondering aloud: what it will take to turn things around for Square?
Jack Dorsey’s Role
A potential catalyst for SQ stock occurred with the recent news that Jack Dorsey would be leaving his executive role with Twitter (NYSE:TWTR) effective immediately. He had been the chief executive officer of both Square and Twitter. So, this move leaves him to focus his energies and talents solely on Square. A reason for Dorsey, age 45, leaving Twitter wasn’t given. The announcement also didn’t say that Dorsey would now concentrate exclusively on Square.
Running both companies had long been a source of criticism levied against Dorsey. Last year, activist shareholder and billionaire investor Paul Singer publicly criticized Dorsey for running both Square and Twitter at the same time. He also called for Dorsey to step down as CEO at one of the publicly traded companies.
Dorsey is being replaced at Twitter by Parag Agrawal, who had previously been Twitter’s chief technology officer. Dorsey has been at the helm of Square since the company was founded in 2009. He steered it through its 2015 initial public offering (IPO) and grew Square into a company that today has a market capitalization of around $91 billion.
Since its IPO, SQ stock has returned to shareholders a gain of 1,555%. The current slump in the share price is the steepest in the six years since Square’s IPO. Having Dorsey free of his obligations at Twitter and able to concentrate on Square is seen as a positive news by investors. Square’s stock rose on news of the Twitter separation.
Cryptocurrency Volatility
Square’s Cash App remains in demand and the company continues to report decent financial results. In this year’s third quarter, Square reported that its revenue rose 27% year-over-year. While fairly strong, it was a sharp decline from the annualized revenue growth of 143% recorded in this year’s second quarter. Additionally, the company’s gross profit from its Cash App amounted to $512 million in Q3. This means it is up 33% from the same period of 2020, but slower than had been expected. While the financial results underwhelmed many investors, analysts point out that the issue impacting Square’s financials is the company’s growing focus on cryptocurrencies, notably Bitcoin (CCC:BTC-USD).
Jack Dorsey is one of the biggest and most reputed cryptocurrency bulls. He is outspoken in his support of decentralized finance (DeFi) systems and has been pushing Square into digital assets for years. Consumers have been able to buy and sell Bitcoin on the Cash App since 2018. Media reports vary, but the most recent estimates state that Square currently owns just over 8,000 Bitcoin holdings valued at about $470 million based a BTC price of $58,700 per coin. The substantial holdings of Bitcoin makes Square vulnerable to the volatile price swings that are inherent in the largest cryptocurrency. Some shareholders have called for the company to stop investing in crypto.
The calls to deleverage its cryptocurrency holdings look likely to go unheeded. If anything, Jack Dorsey looks to be leaning into cryptocurrencies. The company recently released a white paper that outlined its views on developing a decentralized protocol for exchanging digital and fiat currencies called “tbDEX.” Coinciding with the white paper, Square announced the launch of a new division within the company that will focus on building a decentralized Bitcoin exchange. This would allow the cryptocurrency to be used for payments in a variety of ways all over the world. Clearly, Dorsey is fully committed to Bitcoin and the potential of cryptocurrencies.
Buy SQ Stock for the Long-Term
Jack Dorsey is a visionary who conceived of Twitter as an undergraduate student at New York University. Since then, he has built both Twitter and Square into global leaders in their respective fields. Now that Dorsey is free of his daily responsibilities at Twitter, he can concentrate on Square and his vision for the future of digital payments. While that vision includes a heavy reliance on cryptocurrencies, including a new Bitcoin exchange, Square remains a diverse, profitable, and global company. Investors willing to tolerate some volatility should buy SQ stock while it is on sale.
On the date of publication, Joel Baglole held a long position in SQ. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
