Square (SQ) thrives on crypto power; expands non-core businesses

Square, Inc. (NYSE: SQ) is riding on the bullish sentiment in the Bitcoin market, after making a major investment in the cryptocurrency. The company’s stock climbed to a record high this month as investors responded positively to the increasing acceptance of Bitcoin, which was endorsed by the likes of Tesla (TSLA). The upbeat sentiment reflected in the performance of other fintech stocks also.

Stock Peaks

After a prolonged rally that resulted in a four-fold increase in the price, in less than a year, Square’s stock looks overvalued. Experts see a reversal of the trend this year and a withdrawal from the peak. The future prospects remain strong but the near-term outlook calls for caution as far as investing in Square is concerned. On Tuesday, the consensus rating on the stock was moderate buy.

From Square’s third-quarter earnings conference call:

“Since last quarter, we announced two strategic investments that aligned with that purpose. The first was the hundred-million investment in support of minority and underserved communities and toward our commitment to ending racial justice. The second was a $50 million investment into Bitcoin, which we believe will be the native currency of the Internet and help people around the world better participate and thrive in the economy.”

Strong Q3

The San Francisco, California-based financial services and payments company bounced back quickly from the slowdown experienced in the early months of 2020 and registered a 12% growth in its third-quarter revenues to about $3 billion. Consequently, adjusted earnings jumped by a third to $0.34 per share. The numbers far exceeded the market’s outlook.

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Last month, electric car giant Tesla purchased Bitcoin tokens worth $1.5 billion, to become one of the few high-profile entities to invest in the cryptocurrency. The move came as a major boost to crypto owners and is expected to set a new precedent – of companies converting a part of their cash into digital currencies to have a more flexible balance sheet.

Diversified Strategy

Square’s Seller Ecosystem provides services like Square Reader and Square Stand to businesses and merchants, which allows the company to generate revenue at a flat rate and on a percentage-per-transaction basis. The other revenue source is Cash App, a mobile payment service that allows customers to transfer money through an app. It is estimated that more than 2.5 million customers purchased stocks using Cash App since it was launched about a year ago, and the number continues to grow.

The diversified approach and steady expansion of the non-core areas of the business – like food delivery, website building, and deep learning – give the company an edge over traditional financial institutions.

“We continue to grow the network through strong new customer acquisition, drive adoption of our products, and see healthy engagement and daily utility. As expected, we saw a reduction in transaction volume per active customer in October, driven by moderating inflows and stored funds, albeit still well above pre-COVID levels,” said Square’s chief financial officer Amrita Ahuja at the third-quarter earnings conference call.

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Read management/analysts comments on quarterly reports

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Square’s stock made sharp gains this week and climbed to a new high, crossing the $260 mark. The stock has gained 18% this year alone, after gaining multi-fold since the pandemic-driven sell-off early last year.