Square Rides Bitcoin To Triple-Digit Growth
Square (NASDAQ:SQ) is an up-and-coming fintech that is benefiting greatly from the shift to eCommerce spurred by the pandemic, and from renewed interest in cryptocurrency. The company, already growing at a significant clip, saw its revenue growth accelerate from the high double-digit range to well into the triple digits, and then accelerate again in the 4th quarter. Now, with the company committed to expanding its reach, depth, and services the outlook for growth is only getting better.
The problem for shareholders now is that Square is investing heavily in Bitcoin and its share prices have become tied to the cryptocurrency. Square just announced the second of two major purchases of Bitcoin bringing its total holdings to 8,027 BTC or about $399 million with BTC at $49,650. The purchases are part of Square’s expansion into the crypto-verse and will not be the last so we expect BTC-led volatility to persist. The upshot is that, based on recent price action, Squares unrealized gains in Bitcoing are about $180 million or 80%.
"Square believes that cryptocurrency is an instrument of economic empowerment, providing a way for individuals to participate in a global monetary system and secure their own financial future. The investment is part of Square’s ongoing commitment to bitcoin, and the company plans to assess its aggregate investment in bitcoin relative to its other investments on an ongoing basis."
Square Reports Solid Quarter, Outlook Is Bright
Square had a great 4th quarter and not just because of Bitcoin. Square’s decision to facilitate Bitcoin transactions has a lot to do with it but the core business is growing as well. On a consolidated basis, revenue grew 409.5% on a YOY basis to $3.16 billion to outpace the consensus by 160 basis points. The bulk of the revenue is due to Bitcoin, about $1.76 billion or up 1000% YOY, with strength seen in both the Cash App and Seller Ecosystem as well. The Cash App, the business’s true core, saw its revenue jump 127% with a solid double-digit gain in Seller Ecosystem revenue.
Moving down the report, the company saw a substantial improvement in margins due to volume and Bitcoin transactions. Gross profit grew 52% and delivered strong bottom line beats on both a GAAP and adjusted basis. The GAAP $0.59 beat by $0.59 or 100% while adjusted earnings of $0.32 beat by $0.08 or about 33%. Looking forward, the company is expecting strength in both revenue and earnings to continue and is forecasting growth for 2021.
“We see compelling opportunities to increase our investments across our Cash App and Seller ecosystems... We have achieved attractive returns on our sales and marketing investments as customers have turned to our ecosystems to help them in dynamic environments, and we intend on continuing to expand and strengthen our product offerings. We believe our ecosystems can reach customers in new markets and see significant opportunities to invest behind long-term growth.”
The Technical Outlook: Square Is Trending Higher
Shares of Square have been moving steadily higher since hitting the 2020 bottom and that run may not be over despite recent price weakness. The analysts are, for the most part, very bullish on this stock and expect it to move higher as do we but there is a caveat. There were 8 major analyst calls in the wake of the report and 7 include price target upgrades. The 8th is from Wells Fargo who downgrades the stock to Equal Weight with the notion growth is already priced in. If that is the case the run-up in prices may not go much further.
That said, the pullback in Square looks like a buying opportunity to us. The pullback is, for the most part, due to the pullback in Bitcoin prices and that impact should not last long. For one, Bitcoin prices are already bouncing back and for another, Bitcoin prices aren’t going to have a negative impact on Square's Bitcoin-derived revenue. If anything, Bitcoin volatility should drive BTC transactions and Square's revenue. So long as the company can continue to sustain growth and it looks like it will, this stock should keep moving higher.
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