Why Is Square (SQ) Down 23.6% Since Last Earnings Report?

It has been about a month since the last earnings report for Square (SQ). Shares have lost about 23.6% 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 catalysts.

Square Surpasses Earnings & Revenues Estimates in Q2

Square delivered second-quarter 2019 adjusted earnings of 21 cents per share, which beat the Zacks Consensus Estimate by 5 cents and was also higher than management’s guided range of 14-16 cents per share. The figure also soared 61.5% on a year-over-year basis and 90.9% sequentially.

Net revenues of $1.17 billion surpassed the Zacks Consensus Estimate of $1.11 billion and also came ahead of the guided range of $1.09 billion to $1.11 billion. The figure improved 44.1% from the year-ago quarter and 22.4% sequentially.

Per the company, adjusted revenues came in $562.8 million, up 46% year over year and 15.1% from the previous quarter. The figure also comfortably outpaced management’s guided range of $545-$555 million.

The top line was driven by robust performance of Cash App, which contributed 260 million to the net revenues during the second quarter.

Further, Cash Card’s strengthening adoption rate contributed to the results. During the second quarter, 3.5 million customers utilized the product. Further, benefits from Weebly and Zesty acquisitions, which contributed 2% to the net revenues, remains a positive.

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

The company’s solid momentum across sellers and strong product portfolio are tailwinds and are likely to continue aiding its performance in the near term.

Gross Payment Volume

Gross Payment Volume in the first quarter came in $26.78 billion missing the Zacks Consensus Estimate of $26.8 billion. Notably, the figure improved 25.3% year over year and 18.6% on a sequential basis.

Year-over-year 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 54% to total GPV, up 34% year over year. Further, Square witnessed strong contributions from mid-market sellers who accounted for 26% of total GPV, up 45% from the year-ago quarter.

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

Additionally, strong performance of Square for Restaurant, especially in the food and drink vertical, which accounted for 26% of GPV during the reported quarter, aided the results. Further, third-party applications which contribute more than 20% of the GPV remain a key catalyst.

Top-Line Details

Transaction (66% of net revenues): The company generated transaction revenues of $775.51 million, up 24% year over year. Revenue growth within this category can be attributed to strengthening momentum across sellers and robust Cash App.

Subscription and services (21.4% of revenues): The company generated $251.38 million revenues from this category, soaring 87.1% from the year-ago quarter. This improvement came on the back of strong performance by Cash App. Additionally, robust Caviar and Instant Deposit were major positives. Further, Square Capital, which facilitated $528 million of business loans during the second quarter, up 36% year over year, contributed to the performance.

Hardware (1.9% of revenues): Square generated $22.26 million of revenues from this business, up 21.2% year over year. The top line within this category was primarily driven by Square Terminal and Square Reader.

Bitcoin (10.7% of revenues): Square generated $125.08 million revenues from this category, soaring 237.9% on a year-over-year basis. Square continues to benefit in the bitcoin space on the back of growing momentum of Cash App among users. Further, rise in the price of bitcoins acted as tailwind in accelerating volume.

Operating Details

Per the company’s report, gross profit as a percentage of net revenues came in 40%, expanding 130 bps year over year. This can primarily be attributed to strong bitcoin, transaction and subscription gross profits.

Adjusted EBITDA as a percentage of adjusted revenues was 18.7%, expanding 100 bps year over year.

Operating expenses came in $466.7 million, surging 46.5% from prior-year quarter. Adjusted operating expenses were $364 million, up 45% year over year.

Product development expenses were $174.2 million, up 51.7% year over year, primarily owing to growing engineering, data science and design personnel costs. Further, cost related to Weebly acquisition led to increase in these expenses.

General and administrative expenses were $100.5 million, up 21.4% from prior-year quarter. This was primarily owing to finance, legal and support personnel costs.

Further, sales and marketing costs were $156.4 million, up 59.2% year over year, due to increase in Cash App peer-to-peer payment transfer and Cash Card issuances.

Balance Sheet

As of Mar 31, 2019, cash and cash equivalents balance was $617.3 million, up from $521.7 million as of Mar 31, 2019. Short-term investments were $572.2 million in the reported quarter, up from $566.5 million in the previous quarter.

Long-term debt was $919 million, increasing from $909.3 million in previous quarter.

Guidance

For third-quarter 2019, Square expects net revenues between $1.13 billion and $1.15 billion.

Further, adjusted revenues are anticipated in the range of $590-$600 million. Adjusted EBITDA is expected in the band of $106-$110 million.

Adjusted earnings are expected in the range of 18-20 cents per share.

For 2019, Square maintains previous guided range for total revenues at $4.41-4.47 billion.

Further, management reiterated revenue guidance at $2.25-$2.28 billion. Adjusted EBITDA is anticipated in the range of $405-$415 million.

Adjusted earnings are projected in the range of 74-78 cents per share.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -46.43% due to these changes.

VGM Scores

Currently, Square has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

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

Outlook

Square has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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