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Why Square Is Selling Its Caviar App to DoorDash

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Payment platform Square (SQ) inked a deal with DoorDash yesterday to sell its Caviar food-delivery app for $410 million. Square, which bought Caviar for $44.3 million in 2014, expects the transaction to close by the end of this year.

Caviar contributed $251 million of the company’s subscription and service revenue in the second quarter. The deal is expected to boost revenue for DoorDash, one of the most popular food delivery apps in the US. The Caviar deal would add premium restaurants to DoorDash’s list, and cater to different customers. Caviar’s extensive geographic footprint would also bring in new customers to the privately held DoorDash.

Square already uses DoorDash’s delivery app to process orders for its restaurant clients. In June, Square also joined hands with on-demand delivery service provider Postmates. Postmates and DoorDash are the top third-party restaurant-delivery services in the US, according to Second Measure. In 2016, Square reportedly tried to sell Caviar and was in talks with Uber, Yelp, and GrubHub about the sale, which didn’t happen.

Square seeks to focus on other profitable areas

Square’s decision to sell the Caviar food app came as it aims to boost its profits and concentrate on its core payment business. The Caviar app’s high costs hurt Square’s margins. Therefore, selling Caviar could let Square focus on restaurants and food sellers through a payment platform rather than delivery services, which could drive profits. The company’s mobile payment service, Cash App, is gaining immense popularity.

Square’s Cash App also present stiff competition for rival PayPal’s (PYPL) Venmo. According to Nomura Instinet analyst Dan Dolev, Venmo’s user acquisition is slowing down. In May, Venmo’s YoY (year-over-year) growth fell to 35% from 54% in April, 47% in March, and 44% in February. On the other hand, Square’s Cash App user base more than doubled YoY last year, to 15 million monthly active accounts from 7 million.

Q2 results and weak guidance

Square announced the Caviar sale along with its second-quarter results. While the company’s earnings and revenue were strong in the second quarter, it still failed to impress investors. Its third-quarter guidance was weaker than expected, pulling down its stock price.

The Square stock fell around 6.8% in after-market trading yesterday, and more than 9% in pre-market trading today. The stock closed yesterday at $80.98. Year-to-date, Square stock has risen around 44.4%, while the S&P 500 has gained 17.8%.

In the second quarter, Square’s EPS rose YoY from $0.13 to $0.21, beating analysts’ estimates of $0.17. Its adjusted revenue grew 46% YoY to $563 million, also beating Wall Street’s estimate of $557 million. However, the company’s YoY revenue growth has decelerated in the last three quarters.

Square now expects EPS and revenue of $0.18–$0.20 and $590 million–$600 million in the third quarter. Meanwhile, analysts expect it to see EPS of $0.21 and revenue of $599.03 million.

Peer comparison

Square competes with Shopify (SHOP) in processing payments for small businesses. Like Square, Shopify beat analysts’ earnings and revenue estimates in its second-quarter results, which it released yesterday. Shopify also raised its full-year revenue forecast, to $1.51 billion–$1.53 billion from $1.48 billion–$1.50 billion.

Last month, PayPal disappointed when its Q2 revenue missed analysts’ estimate. PayPal also reduced its 2019 revenue forecast to $17.6 billion–$17.8 billion. It now expects lower revenue growth, of 14%–15% rather than 16%–17%.

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