The payment and financial services company Square (NYSE: SQ) saw a drop in its share price in March, much like most of the market. Social distancing measures have hit many of its small client companies hard and put pressure on the company’s gross payment volume (GPV) in several of its vertical sectors. On March 24, the company reduced its forecast for net revenues from $ 20 million to $ 40 million for the first quarter. It also withdrew its annual guidelines.
But since the revision of its estimates, Square’s share has started to rebound, with the share price dropping from a low of $ 38 in March to now above $ 59 at the time of this writing. Although the company could not provide much short-term advice for the second quarter or the rest of the year, it had a few positive points to remember during a conference call on March 24. When you consider that the company had performed very well before the virus and that it recently received approval from federal and state regulatory authorities to open a bank, the company’s long-term prospects are very positive.
Image source: Square.
Some good takeaways
During its conference call, the company said it was witnessing a significant drop in GPV in late March, as Square’s food and beverage retailers and retailers account for 43% of the company’s GPV. In the 10 days to March 24, the GPV fell 25% from the same 10 days in 2019. Square executives said the deceleration would likely continue in April. The company added that loan arrangements would likely slow and that it would limit some of its discretionary spending by freezing hiring for non-essential positions.
However, Square executives pointed out that about a quarter of its customers, most of whom are in professional services and the home and repair industries, saw far fewer effects from the coronavirus and were more considerate of the previous payment and revenue forecasts. The company also said it has seen an increase in its investing activities via its stock and Bitcoin treasury app, as market volatility has created additional trading opportunities.
The Cash app was a positive for Square in March. The digital product, which provides financial products and services to help individuals manage their money, has attracted a record number of new customers organically. Another thing that should put investors at ease is that Square has around $ 3.1 billion in available cash, which the company says is enough to withstand the volatility of the next two years.
Heading in the right direction
Before the coronavirus disrupted global markets, Square declared net income of $ 375 million in 2019 after four consecutive years in the red. Company executives also said on the conference call that gross profits in January and February were up 47% year over year. Square received more good news in March when FDIC and Utah state regulators approved the company’s offer to open an industrial bank, a process that began in 2017.
Square is one of the first financial technology companies to successfully obtain a bank charter, which will help the company strengthen the financial services part of its business, an initiative which, according to CEO Jack Dorsey, is very important. . The industrial bank will allow Square to offer more deposit products and make more loans which are probably more important in terms of duration and duration. While Square is offering loans right now because it is not a bank, the company uses a third-party bank to initiate the loan, which it then buys from the bank and sells to third-party investors.
The ability to create your own loans would likely remove some of these set-up costs from your supply chain and potentially allow the bank to generate interest income on these loans if they wish, although Square expects to continue to sell loans to third party investors. Additional deposit products will allow Square to provide cheaper sources of capital. The company has already established a huge ecosystem, providing millions of customers for cross-selling new financial services products. It also has the power to quickly approve loans because of all the data Square has about its customers through its other products.
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The company may experience difficulties in the short term due to declining revenues and the GPV due to the effect of the coronavirus on food and beverages and retail customers. These customers will find it difficult to generate income, and their cash flow will decrease accordingly, affecting Square’s business. However, these customers are expected to rebound after the pandemic ends. Square also has a lot of positive movement in other areas of its business, in particular with its Cash App and the bank charter it has just received.
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Bram Berkowitz has no position on any of the titles mentioned. The Motley Fool owns shares of Square and recommends Square and recommends the following options: short September 2020 $ 70 put on Square. The Motley Fool has a disclosure policy.
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