The payments and financial services company Square (NYSE:SQ) saw a decline in its stock price in March, not unlike most of the market. Social distancing measures have hit many of its small business retail customers hard and put pressure on the company’s gross payment volume (GPV) across several of its verticals. On March 24, the company reduced its net revenue projections by $20 million to $40 million for the first quarter. It also withdrew its yearly guidance.
But since revising its estimates, Square’s stock has begun to rebound, with the share price rising from a low in March of $38 to now trading above $59 as of this writing. While the company could not provide much short-term guidance for the second quarter or the rest of the year, it did have some positive takeaways during a conference call on March 24. When you consider that the company had been performing very well before the virus, and that it also recently received approval from federal and state regulators to open a bank, prospects for the company’s long-term outlook are very positive.
Some good takeaways
On its conference call, the company said it was seeing a significant decline in GPV toward the end of March because Square’s retail and food and drink retailers comprise 43% of the company’s GPV. In the 10 days leading up to March 24, GPV was down 25% from the same 10 days in 2019. Executives at Square said that deceleration would likely continue in April. The company added that loan originations would likely slow, and the company would curb some of its discretionary spending by freezing hiring for non-essential positions.
However, Square executives pointed out that about a quarter of its clients, most of which are in the professional services and home and repair industries, saw much less of an effect from the coronavirus and were holding more in line with previous payment and revenue projections. The company also reported seeing an uptick in investing activity through its Cash App in equities and Bitcoin, as market volatility created additional trading opportunities.
The Cash App was a bright spot for Square in March. The digital product, which provides financial products and services to help individuals manage their money, brought in a record number of new customers organically. Another thing that should put investors at ease is that Square has about $3.1 billion in available liquidity, which the company said is sufficient to weather volatility for the next two years.
Heading in the right direction
Before the coronavirus threw global markets into turmoil, Square reported net income of $375 million in 2019 after four consecutive years in the red. Company executives also said on the conference call that gross profits in January and February were up 47% on a year-over-year basis. Square received more good news in March when the FDIC and Utah state banking regulators approved the company’s bid to open an industrial bank, a process that first began in 2017.
Square is one of the first fintech companies to successfully obtain a bank charter, which will help the company strengthen the financial services part of its business, an initiative that CEO Jack Dorsey says is very important. The industrial bank will allow Square to offer more deposit products and make more loans that are likely larger in size and duration. While Square does offer loans right now, because it is not a bank, the company uses a third-party bank to originate the loan, which it then buys back from the bank and sells to third-party investors.
Being able to originate its own loans would likely remove some of those origination fees from its supply chain and eventually allow the bank to make interest income from those loans if it wants to, although Square expects to keep selling loans to third-party investors. Additional deposit products will allow Square to bring in more cheap sources of capital. The company has already built up a huge ecosystem, providing millions of customers to cross-sell new financial service products to. It also has the power to approve loans quickly because of all the data Square has on its customers provided through its other products.
Square is a buy
The company could struggle in the short term as revenues and GPV decline due to the effect of the coronavirus on food and drink and retail customers. These customers will struggle to make revenue, and their cash flow will wane as a result, affecting Square’s business. However, these clients should rebound after the pandemic subsides. Square also has a lot of positive movement in other parts of its business, particularly with its Cash App and the bank charter it just received.