Is Square Stock A Buy After An Impressive Earnings?

  • Square reported better than expected earnings results for Q4 and 2015.
  • The company provided impressive guidance that predicts a positive adjusted EBITDA in 2016.
  • I remain cautious as global expansion and emerging revenue streams are in question.

Digital payments service provider Square (NYSE:SQ) reported its first earnings results as a public company with better than expected results that beat analysts’ expectations in multiple areas and presented impressive YoY growth. Since Square went public last November, the company’s stock has fluctuated greatly amidst global equity markets instability. In almost two months, Square’s stock price declined to below its IPO price of $9 as shown in the chart below.

The sharp decline in Square’s stock price was influenced by concerns over CEO Dorsey co-managing Square and Twitter (NYSE:TWTR), and concerns about future growth pressured the stock to go down sharply. The recent earnings release was an important milestone not only for Square as a public company but also for its peer, Stripe, which is considering an IPO, and other FinTech companies that have experienced a tough period lately.

Square_chart 7_031016

Looking at Square’s revenues metrics, the total net revenues grew 49% YoY, and 53% when excluding the revenue  from Starbucks (NASDAQ:SBUX) partnership that expires in Q3 2016. Square’s main revenue stream continues to be its core transaction business with $299M revenues in Q4 and $1.1B in 2015, which accounts for 83% of the company’s annual revenues in 2015. The YoY growth of the transaction revenues is a bit lower than previous quarters but still an impressive 45%.

The Starbucks revenue stream grew by 29% YoY and quietly reached its all-time high of $47M, which reflects an unusual one-time YoY increase compared to a small regular increase that varies between single digits to low teens. Square’s emerging revenue stream, the software and data business, accounted for 6% of the company’s revenues in Q4 and 5% of the annual revenue and grew at an incredible pace of 272% YoY.

As shown in the chart below, Square presented decent profit growth with $109M in gross profits in Q4, which reflects a steady 29% gross margin for the company as it was in the previous quarters. The company’s net loss figure is slightly worsening, but it remains in control mainly due to the operating expenses to revenues ratio remaining relatively flat.

Square_chart 6_031016

Square released an optimistic guidance that presents a positive $6M to $12M positive adjusted EBITDA in 2016 and $610M adjusted revenues (excluding Starbucks), which reflects a 35% YoY growth. The fact that the business has grown into the positive adjusted EBITDA territory while continuing to grow rapidly (even though growth has declined) is a strong indicator that Square’s growth is sustainable and well-managed.

Square’s results surprised the market and triggered a 3.7% rally in the extended trading after the earnings, easing the pressure on CEO Dorsey and reassuring the market about Square’s emerging revenue stream and its ability to generate an increasing amount of money each quarter.

The market’s initial reaction to Square’s results was quickly offset when the stock dropped almost 11% last week following the uncertain expansion plans and eroding annual growth rate which is expected to decline from 54% in 2015 to 35% in 2016 and continue the declining trend. The false positive sentiment impacts not only Square's stock price but also Stripe, which could decide to delay its IPO further and other FinTech companies like PayPal, which are witnessing the market acting very bearish towards a leading player in the FinTech industry and the digital payments market.

Even though the sentiment towards Square changed for a brief moment I remain cautious about buying the stock right now. Even though transaction revenues increased significantly during the year, the intensified competition puts that increase in question going forward. Furthermore, Square’s emerging revenue streams account for a tiny percentage of the company’s revenues and, for now, the company did not provide any information about its global expansion plan, which was supposed to grow its revenues significantly.

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