Why Is Square (SQ) Down 29.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Square (NYSE:SQ). Shares have lost about 29.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Square due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Square Surpasses Earnings & Revenues Estimates in Q4

Square reported fourth-quarter 2019 adjusted earnings of 23 cents per share, which beat the Zacks Consensus Estimate by 15%. The bottom line was also higher than management’s guided range of 19-21 cents per share. Further, the figure improved 64.3% on a year-over-year basis but declined 8% sequentially.

Net revenues of $1.31 billion surpassed the Zacks Consensus Estimate of $1.19 billion and came ahead of the guided range of $1.16-$1.18 billion. The top line also improved 41% from the year-ago quarter and 3.7% sequentially.

We note that the company has stopped reporting adjusted revenues from fourth-quarter 2019 onwards.

The top line was driven by Seller ecosystem that contributed $938 million to net revenues, up 26% year over year. Further, robust performance of Cash App, which generated $361 million of net revenues, up 147% year over year, was a major positive. Furthermore, strengthening momentum across Bitcoin and rapid adoption of Cash Card contributed to the results.

Additionally, continued acceleration in gross payment volume (GPV) drove the results.

Notably, the company completed the divestiture of Caviar to DoorDash at the end of October 2019. Caviar had been underperforming and consequently its sale remains a major positive.

Excluding Caviar, net revenues would have exhibited growth of 46% on a year-over-year basis.

We believe the company’s solid momentum across sellers and strong product portfolio is likely to continue aiding performance in the near term.

Gross Payment Volume

GPV in the fourth quarter amounted to $28.64 billion beating the Zacks Consensus Estimate of $28.54 billion. Notably, the figure improved 25% year over year and 1.5% on a sequential basis.

GPV growth was driven by the company’s continued momentum across the larger sellers.

Square defines larger sellers as those that make more than $125,000 of annualized GPV and mid-market sellers as those with annualized revenues of more than $500,000.

GPV from larger sellers contributed 55% to total GPV, up 33% year over year. Further, Square witnessed strong contributions from mid-market sellers, which accounted for 27% of total GPV, up 42% from the year-ago quarter.

This can be attributed to Square’s robust product portfolio and comprehensive ecosystem that aided the company in attracting new sellers to its platform while retaining the existing ones.

Additionally, robust Square Capital aided the company’s momentum across the seller ecosystem. This was a positive. Further, expanding international presence of Square Terminal remained a tailwind.

Top-Line Details

Transaction (63.4% of net revenues): The company generated transaction revenues of $832.2 million, up 25% year over year. Revenue growth within this category can be attributed to strengthening momentum across sellers.

Subscription and services (21.4% of revenues): The company generated $281.4 million revenues from this category, surging 45% from the year-ago quarter. This improvement can be attributed to the strong performance by Cash App, which contributed $183 million to the category’s top line. Further, solid momentum across seller subscription and services products remained positive. Additionally, Square Capital, which facilitated 97,000 originations worth $ 671 million, up 42% from the year-ago quarter, contributed to the results.

Hardware (1.7% of revenues): Square generated $22.3 million of revenues from this business, up 23% year over year. The category’s top line was primarily driven by robust Square Terminal and Square Reader for contactless and chip.

Bitcoin (13.5% of revenues): The company generated $177.6 million revenues from this category, soaring 238.6% on a year-over-year basis. Square continued to benefit in the bitcoin space on the back of growing adoption of Cash App. Notably, without bitcoin revenues, Cash App revenues would have come in at $183 million.

Operating Details

Per management, gross profit as a percentage of net revenues came in 40.1%, contracting 60 basis points (bps) year over year. While Transaction, Subscription and services and Bitcoin generated profit, Hardware category reported loss during the reported quarter.

Adjusted EBITDA as a percentage of net revenues was 9%, expanding 30 bps year over year.

Operating expenses came in $509.7 million, surging 33% from prior-year quarter.

Product development expenses were $173.3 million, up 22.2% year over year, primarily owing to growing engineering, data science and design personnel costs.

General and administrative expenses were $118.2 million, up 23.8% from prior-year quarter. This was primarily owing to finance, legal and support personnel costs.

Further, sales and marketing costs were $185.2 million, up 55.2% year over year, due to increase in Cash App peer-to-peer payment transfer and Cash Card issuances.

Balance Sheet

As of Dec 31, 2019, cash and cash equivalents balance was $1.05 billion, up from $612.04 million as of Sep 30, 2019.

Short-term investments were $492.5 million in the reported quarter, down from $557.6 million in the previous quarter.

Long-term debt was $938.8 million, increasing from $928.9 million in previous quarter.

Guidance

For first-quarter 2020, Square expects net revenues between $1.34 billion and $1.36 billion.

Gros profit is anticipated in the range of $550-$560 million.

Adjusted earnings are expected in the range of 16-18 cents per share.

For 2020, Square expects total net revenues between $5.9 billion and $5.96 billion.

Gros profit is anticipated to lie between $2.44 billion and $2.475 billion.

Adjusted earnings are projected in the range of 90-94 cents per share.

We note that mid-points of both earnings and revenue guided ranges for first-quarter 2020 and full year 2020 are above the Zacks Consensus Estimate.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 91.03% due to these changes.

VGM Scores

At this time, Square has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. It comes with little surprise Square has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.