Square (Nasdaq: SQ) gapped up 13% higher following its earnings report but finished the day 7% higher. Square's report showed that the digital economy is thriving, while the "brick and mortar" economy is flailing, as it has exposure to both parts.
Inside the Numbers
The main headline was the company's revenue increased by 64%, and its consumer-facing Cash App added 4 million users. However, one caveat to the earnings was most growth was due to crypto buying, and Square only earns 2% margins on these transactions. And, this may have accounted for the stock giving up half of its gains.
The company posted revenue of $1.92 billion and $0.18 per share in earnings. It compares to expectations of $1.6 billion and a $0.05 loss per share. The digital segment of the company accounted for all the growth. Gross profit for the Cash app came in at $281 million which was an increase of 167% compared to 2019's Q2. Customer balances also increased by 86% with the company attributing some of this growth to the enhanced unemployment insurance, stimulus, and tax refunds. Cash app also now has 30 million subscribers.
Square also does payment processing for small businesses, and this part was weak due to shutdowns and decreased foot traffic for location-based businesses. Gross profit for this unit declined by 9% to $316 million, and total gross payment volume declined by 15%. Since these metrics depend on the health of small businesses', the virus' spread, and people's confidence in going out, the company didn't give a forecast on when or if these trends will improve. However, Square did say that these figures improved with economies gradually reopening, although there was some weakness in areas with spiking case counts.
Some of these sales did move online which Square helped facilitate. Payment volume from online selling increased by 50% on a year over year basis. Additionally, online payment processing now accounts for 25% of the total payment volume.
Stock Price Impact
Square's huge gain was puzzling. If you take out crypto sales, the company's revenue was flat with weakness in physical stores offsetting strength in online sales. The company takes 2% on crypto transactions, so it doesn't seem to justify a $7 to $10 billion increase in valuation.
Going into earnings, Square's stock had been on a massive run, as it's gained nearly 280% from its March lows with a 20% gain in July. While the headline of Square beating its revenue target by 64% seems impressive, it's less so with a closer look.
From a bigger picture perspective, Square's outperformance makes sense. Overall, spending is only modestly down, but so many outlets of this spending are unavailable, impaired, or capacity-constrained. Online is one place with none of these issues. The digital economy was already becoming a bigger part of the overall economy, and this has accelerated due to the coronavirus. Companies like Shopify (Nasdaq: SHOP), Wayfair (Nasdaq: W), Etsy (Nasdaq: ETSY), and Paypal (Nasdaq: PYPL) are benefitting, and Square is being included in this group.