Square Stock (NYSE:SQ) Climbing Despite Questions

Square NYSE: SQ reported third-quarter earnings on November 6 and beat analysts’ expectations. The disruptive fintech company posted better-than-expected revenue and profit figures. The earnings per share (EPS) of 25 cents per share was particularly encouraging for Square bulls. Square has now beaten analyst’s expectations in every quarter for 2019.

Square shares jumped over 7.5% on the positive earnings report. However, in early morning trading on November 8, the stock had given up most of those gains. This has been a pattern for Square which is up just a little over 5% for the year as of this writing. The two primary reasons for this were a small dust-up with the Securities and Exchange Commission (SEC) and analysts who remain skeptical about Square’s core business growth.

Square is making a change in its accounting standards

Just two days after reporting its earnings, Square announced that they would no longer be issuing an “adjusted revenue” number in their earnings report. The company received a comment letter from the SEC in which it was told that “adjusted revenue” is not a metric that conforms to Generally Accepted Accounting Principles (GAAP).

In its defense, Square said it has been using the metric since 2015 in order “to provide investors and analysts with useful metrics to measure the performance and growth of our ongoing recurring business and allow comparability to other businesses in the payment processing sector.” Adjusted revenue was typically lower than GAAP total net revenue.

Square is not the only business to deal with legal and regulatory issues. Qualcomm has recently put to bed antitrust investigations in which the company has been accused of abusing its “dominant market position”. These concerns have weighed down their stock.

Square is exploring multiple revenue streams

Square is a relative newcomer in the fintech category. But the company is becoming hard for business owners to ignore. In fact, companies like Square are changing the role that traditional banking plays for many businesses. At the end of the company’s second-quarter, Square’s gross payment volume showed a 25% year-over-year increase to $26.8 billion. The company also posted adjusted revenue growth of 46%.

Still, Square is making an aggressive effort to cast a wide net in terms of possible revenue streams. On November 1, Square began instituting a revised transaction cost policy for its core business. Under the new policy, Square now charges customers 2.6% plus 10 cents for all tapped, dipped, and swiped transactions. This is a change from the previous 2.75% transaction cost. Small and medium-sized business (SMB) owners that make up a significant portion of Square’s payment volume expressed their displeasure, but this seems like much ado about nothing. Ultimately, the same merchants that are voicing their complaints know that Square is the best game in town. And it will continue to be as they continue to add services beyond payment processing.

In 2018, Square acquired Weebly, the website building company. The company is now rolling out new products to help small businesses build out websites and e-commerce stores which puts them in direct competition with Shopify NYSE: SHOP. Square already has an established customer base so, with proper execution, they should be able to use their current suite of products to make significant in-roads in this space.

Square is looking to expand the capabilities of its Cash App

The Square Cash App is the consumer-facing part of Square’s business. It’s like PayPal NASDAQ: PYPL and Venmo. In the second quarter of this year, Square reported that the Cash App made $125 billion in revenue from bitcoin. Square is one of the only fintech companies embracing cryptocurrency. And it looks to be paying off. The company has also begun to leverage its Square Cash app to test small scale, a stock trading capability similar to Robinhood. Although Square is saying that they are looking at the equity trading feature as more of a customer engagement feature than a revenue driver, some analysts are so certain.

Bernstein’s Harshita Rawat expressed concern that the company’s aggressive efforts to monetize the Cash App are masking weakness in their core business. Rawat lowered her price target for Square to $72 from $75.

What’s next for Square stock?

Unfortunately for the Square bulls, the trend does not appear to be their friend. The pattern for the stock goes like this. The stock rallies after solid earnings then begin to drift down, then pops after earnings, then drifts down. The lift after the second quarter was larger than the lift after the first quarter. Therefore it has to be a bit concerning that this lift looks to be far smaller. The new transaction cost policy may give the company some lift in revenue. However, investors won’t realize that until fourth-quarter earnings are released. In the meantime, the company did forecast a lighter earnings outlook that is keeping the stock down.

However, for long-term investors, I think Square has too much to like to ignore. Analysts may quibble about the stock price, but the company is finding ways to capture customers and then find new ways to monetize that base that all tie together. If it does that, the stock will grow into its valuation.