Betting against Square Stock Might Be the Wrong Move

The coronavirus pandemic has impacted businesses around the world. So far, Square (NYSE:SQ) has felt the blow. On March 16, the stock recorded its worst day since going public when it fell 28.6%. Generally, US stocks fell on that day. The coronavirus continues to spread and kill people in the US and globally.

The virus has disrupted global operating and economic environments. Many companies and businesses have shut down. The companies that are still running have scaled back their operations.

Although Square stock is still down about 30% this month, the stock has started to regain the ground it lost. The stock rose more than 5.0% on Monday and rose about 16% on Tuesday. At the time of this writing, Square stock has risen more than 20% and stands above $56.

At $56, the stock is still trading more than 35% below its 52-week peak of $87.

The coronavirus pandemic hasn’t just devastated Square stock. The virus has also impacted the company’s business. On Tuesday, Square downgraded its revenue and profit outlook for the current quarter.

Now, Square expects first-quarter revenue of $1.30 billion–$1.34 billion. Originally, the company forecast revenue of $1.34 billion–$1.36 billion. The company also cut its profit expectations. Square expects its first-quarter gross profit to be $515 million–$525 million. Originally, the company expected to report a gross profit of $550 million–$560 million.

The company dropped its fiscal revenue and profit outlook. Square forecast 2020 revenue of $5.9 billion–$5.96 billion. Meanwhile, the company’s outlook for its 2020 gross profit was $2.44 billion–$2.48 billion.

Although the coronavirus pandemic has shaken Square, it can ride out the storm. The company’s future looks bright beyond the pandemic.

Before the coronavirus started pounding US businesses, Square’s business was booming. In January and February, the company recorded a 47% YoY (year-over-year) increase in the gross profit. Excluding Caviar from its 2019 results, Square’s gross profit actually increased 51% YoY in the first two months of 2020. Caviar provides restaurant food delivery services. Square sold the business in August 2019 to DoorDash for $410 million, which netted a decent profit.

Although Square’s stock and business had a great start in 2020, things started to deteriorate in March. In fact, Square revealed that the situation got worse in the past ten days. During this period, the coronavirus continued to spread in the US. Cities and states started enforcing lockdowns, which disrupted business.

Although the coronavirus is ravaging Square’s seller division, which processes payments for merchants, its Cash App platform hasn’t been impacted as much.

Cash App, which has avoided a serious hit from Covid-19, has emerged as an important growth engine for Square. First, Cash App saw a 60% YoY jump in active users to 24 million at the end of 2019. Second, Cash App’s revenue rose 157% to over $1.1 billion in 2019. The gross profit from the platform rose 135% to $458 million.

People can do a lot of stuff with Cash App. The app launched as a platform for sending and receiving money between people. However, Square has continued to develop the platform. The company added more functions and boosted its appeal. Today, people can use the Cash App platform to trade in Bitcoin and invest in stocks. Also, Cash App has an accompanying debit card that people can use to pay for purchases in-store.

The contribution from Cash App helped Square log 41% YoY revenue growth to $1.3 billion in the fourth quarter. The revenue beat the consensus estimate at $1.2 billion. The revenue from the Cash App platform hit $361 million in the quarter, which rose 147% YoY.

Square stock rose due to its strong fourth-quarter earnings results and hit $79. However, the stock has fallen about 30% since the earnings report due to the coronavirus-driven sell-off.

Congress has reached a deal on massive economic stimulus for US citizens and businesses. The $2.0 trillion stimulus seeks to mitigate the blow from the coronavirus on the US economy. The package includes a direct payment totaling $250 billion to US households to boost consumer spending, according to CNN. There’s also a $350 million funding package for small businesses.

Small businesses are the economic growth engine in the US. For Square, small businesses are its primary customers. More than two-thirds of Square’s customers are merchants that make less than $500,000 in annual sales.

Therefore, the lifeline for small businesses should ease the pressure on Square by boosting the demand for its payment processing service. Processing payment transactions for merchants accounts for most of Square’s revenue. The stock rose on Wednesday due to the news of the stimulus package deal.

Square is always looking for new growth opportunities. On March 18, the company received the regulatory green light to expand into the banking space. The company wants to set up an industrial bank. Square will make loans to businesses and accept deposits.

The bank, which will be called “Square Financial Service,” will start operations next year. Opening a bank will allow Square to expand its loan business, which earns its interest revenue. The loan service contributes toward customer acquisition and retention.

Currently, Square stock is trading around $56. However, Wall Street has a $78 target price for the company.