It’s a controversial stock with an enigmatic leader, but Square has been disrupting the payment space since its 2015 IPO.
Feb. 26, 2020
Shares in Square Inc (NYSE: SQ) were on a meteoric rise in 2020 before the corona-virus-induced chaos enveloped the market this week. The company, founded and run by Twitter (NYSE: TWTR) CEO Jack Dorsey, has sought out to disrupt the payment processing industry, previously dominated by the likes of PayPal (NASDAQ: PYPL) and Mastercard (NYSE: MA).
With more than 740% growth since its November 2015 IPO, and a rise of nearly 20% in January 2020 alone, there will be a lot of interested investors tuning in to this week’s earnings report.
Square will keep growing in 2020
Ok, so maybe Square didn’t have the best 2019, finishing the year up just 11.5% compared to the S&P 5OO’s (NYSEARCA: VOO) 18% gain. Earnings reports were not up to investors’ lofty expectations, leaving many to wonder if the stock had gone as far as it could.
Despite this, there are many reasons to be optimistic.
In its earnings call back in October, Square was still reporting strong growth on the top line, with revenue surging 44% year-over-year to $1.27 billion. Not only that, but management’s full-year guidance for earnings before interest, taxes, depreciation, and amortization (EBITDA) was adjusted to around 18%, driven by a high 30% adjusted margin from seller tools.
Square’s seller ecosystem is generating great results according to CFO Amrita Ahuja. She described the payback as going so well that it has been “too efficient”, and elaborated that the company would focus excess profit in marketing and widening its net to fuel revenue growth in the long term.
Square’s Cash app’s success
Square’s flagship Cash app offers an all-in-one solution for users in managing payments, buying and selling. It has seen tremendous growth, with revenue up 115% in the company’s last quarter. It is on pace to generate $600 million in revenue annually.
The app is becoming the Swiss Army Knife of personal finance, with recent features offering instant deposits for personal use, bitcoin-trading, and fractional stock trading.
Growth over profit
In the war on cash, Square has been an instrumental figure and made it possible for small businesses to use an efficient system for accepting digital payments. However, with $4.3 billion in annual sales, Square is catching up with some of the biggest names in the game such as Capital One (NYSE: COF) and JPMorgan Chase (NYSE: JPM).
On today’s earnings call, management is expected to announce 2020 guidance in the low 30% range for growth over 2019. This seemingly disappointing target has been explained away due to the fact that 2020 is seen as an investing year, with the company still becoming a large business, and growing fast.
By sacrificing near-term profits in order to invest in marketing, the company is setting itself up to rapidly grow its revenue stream once more. Should the company maintain its current top-line growth, investors will likely warm to the stock.
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