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Why Square's share price collapsed despite Q1 earnings beat

Square’s [SQ] Q1 earnings results might have beaten revenue expectations, but weaker-than-expected payment volumes and lowered Q2 guidance saw the share price tank 6% last Wednesday.

In the Q1 results, adjusted earnings came in at $0.11 a share, beating the $0.08 expected by Wall Street. Revenue of $489 million also exceeded expectations, which had been pegged at $478 million.Square 1-year share price performance, CMC Markets, 08 May 2019

 

Revenue from its subscription service was $218.86 million, up 125.5% compared to the same quarter last year. Driving this was the Weebly and Zesty buyouts, without which growth would have been 97%.

Bigger merchants were responsible for nearly half of Square’s payment volume, helping it to rise by nearly one third from the same quarter last year. Large sellers individually contribute $500,000 plus in annual sales so this was welcome news.

Yet, the company’s net loss was $38 million, a sharp increase from the previous quarter’s $28 million.

 

Why did the share price tank?

One big miss was weaker-than-expected gross payments volume. This came in at $22.6 billion, just shy of the $22.8 billion analysts were expecting.

But the real damage to the stock came from lower-than-expected second-quarter guidance. For Q2, the mobile payments provider expects earnings per share to come in between $0.14 to $0.16, below the forecasted $0.18. Expectations for revenue of $545 million to $555 million also missed expectations of $555.6 million.

 

Market cap$28.94bn
Forward P/E61.64
EPS (TTM)-0.13
Quarterly Revenue Growth (YoY)43.50%

Square stock vitals, Yahoo finance, 08 May 2019

 

While Square raised full-year revenue guidance to come in between $2.25 billion to $2.28 billion, it's a small bump from the previously mooted $2.22 billion to $2.25 billion.

"We are revising our net income (loss) per share guidance for the full year of 2019, primarily as a result of the first quarter mark-to-market valuation of our investment in Eventbrite," Square said in a letter to shareholders.

 

Why is Eventbrite a problem?

In the Q1 results, Square saw a $14 million loss from its stake in Eventbrite [EB]. This was better than the previous quarter’s $17 million loss from the stake, but it’s still a dent on Square’s balance sheet.

Square entered into a strategic partnership with Eventbrite in 2017, one year before Eventbrite’s IPO. The partnership included Square making a $25 million investment which turned into common stock once Eventbrite went public.

$25million

Square's investment in Eventbrite

Under accounting rules Square must disclose a “mark-to-market valuation" of its Eventbrite stock every quarter.

With Eventbrite down a horrible 48% since its IPO, Square has seen the value of its investment plummet for all to see in its quarterly earnings.

 

Is Square's stock overvalued?

According to MorningStar, Square has a hefty valuation of 154.72. And it isn't the cheapest stock out there, with a forward P/E of 62.25.

Square's known for conservative guidance, so there's the chance that investors are pricing in better results than analysts are modelling. Seeing that Square has now posted a net loss for four of the last five quarters however, its toppy valuation could now be in danger.

RBC analyst John Davis said in a note to investors after the results: 

“Although we continue to believe there is nothing ‘wrong,’ we simply think the stock is unlikely to maintain its current valuation. As such, we continue to recommend investors reduce positions.”

“Although we continue to believe there is nothing ‘wrong,’ we simply think the stock is unlikely to maintain its current valuation. As such, we continue to recommend investors reduce positions.” - RBC analyst John Davis

Analysts seem mixed on whether to pick up the stock. Among those polled by Bloomberg, there is a split between those who are bullish on the stock and those that could take it or leave it. 18 rate it a "Buy", 16 rate it a "Hold" and 4 have it as a "Sell".

New endeavours into fintech and cryptocurrencies could inspire investor confidence. But if losses continue next quarter, the stock could be in for another thumping.

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