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Square Stock: 2020 Outlook after Doubling Losses in Q1

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Square (NYSE:SQ) stock fell by over 4% in extended trading on Wednesday. The company reported its first-quarter earnings results after the market bell. The company reported losses in the quarter compared to the earnings expectations. However, the revenues beat the estimates in the quarter. Square stock declined 2.11% on Wednesday and closed the trading day at $68.10. At Wednesday’s closing price, the company’s market value was around $29.9 billion.

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Notably, Square’s stock prices have been on a rollercoaster ride. While the stock touched its 52-week high of $87.25 on February 20, it fell to its 52-week low of $32.33 on March 18. Currently, the stock is trading at a 21.9% discount from the 52-week high. Meanwhile, the stock is trading at a premium of 110.6% from the 52-week low. Overall, the stock has gained around 9% this year as of May 6.

Why did Square reported losses in Q1?

Square reported a net loss of $106 million or $0.24 per share in the first quarter. The losses more than doubled from the losses of $38 million or $0.09 per share last year. On an adjusted basis, the company posted a loss of $0.02 per share in the first quarter. Notably, analysts expected an adjusted EPS of $0.13. The adjusted earnings were $0.11 during the same period last year.

The COVID-19 outbreak was the main reason for the huge losses in the first quarter. Square had to fill its reserve funds for its merchant customers amid trying times, which led to losses. Square CFO Amrita Ahuja stated on a conference call that the company has “set a provision in reserve that’s 4 times the typical levels.” A higher provision in reserves means that the company could see more losses in the coming quarters.

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In the first-quarter shareholder letter, the company said that its earnings were “significantly affected by an increase in reserves for transaction and loan losses as a result of the anticipated impact from COVID-19 on losses in future periods.” Square’s transaction and loan loss expenses increased to $109 million in the first quarter of 2020. The transaction and loan loss expenses were around 34.6% higher from the first quarter of 2019 and 41.6% higher than the previous quarter.

Can Square stock revive this year?

Although the coronavirus pandemic has disrupted Square’s operations, I think that the company has the potential to ride out the storm. Square’s revenues rose by 43.9% YoY to $1.38 billion in the first quarter despite the negative impact of the deadly coronavirus. The revenues not only beat analysts’ expectations of $1.29 billion but also topped the company’s original guidance of $1.34 billion–$1.36 billion. Notably, the company lowered its revenue and gross profit outlook in March in response to COVID-19.

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Square has been generating higher revenues due to its payments processing business. The company also provides other financial services, like Cash App, which add to its revenue. Cash App is Square’s money transfer platform, which has gained steam amid the coronavirus pandemic. Cash App is a peer-to-peer app that lets people send and receive money.

In the first quarter, Square’s GPV (gross payment volume) rose to $25.7 billion from $22.6 billion in the first quarter of 2019. Although the first-quarter GPV didn’t meet the analysts’ expectations of $27.3 billion, the volume growth rate has started to improve since mid-April.

Square also witnessed impressive growth in its Cash App business. The gross profits expanded by 115% YoY. The Cash App business grew significantly with the largest net new-transacting active customer additions in March. Square’s direct-deposit volumes also grew three times in April from March through Cash App.

I think that the company’s Cash App service and its growing volumes could help the stock recover its decline in the coming months.

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