Can Square’s share price overcome bitcoin headwind?

Payments giant Square [SQ] has recently published a whitepaper expressing the company’s bullish view on decentralised finance. It has plans to launch an open developer platform for converting funds between fiat (government issued) currency and cryptocurrency, to be known as tbDEX.

Though Square has said it won’t be issuing its own token for use on the platform, the move makes sense. The company is in the business of helping people to transfer money and any technology that enables this to be done more quickly and with less hassle is arguably an advantage.

Despite the release of the whitepaper, the Square share price is down nearly 15% since its publication on 19 November to $192.15 at the close on 3 December. This despite some recovery in the stock after founder Jack Dorsey quit his other company Twitter in executive capacity and is now expected to focus entirely on Square.

There are a couple of reasons why the share price has been dropping. The first is that tdDEX has been in the works for some months – CEO Jack Dorsey first tweeted about it back in July. Another reason is that growth stocks in general have been taking a battering as the Fed begins to taper its bond buying. As inflation in the US continues to surge, there’s more pressure on the Fed to raise interest rates.

This doesn’t sit well with Square. Higher interest rates are not good news for consumer spending and thus companies like Square are likely to see slower growth. Dorsey himself is concerned about the situation, taking to Twitter [TWTR] once again at the end of October to tell his six million followers that hyperinflation is coming soon.

Economics experts speaking to CNBC’sMake It argue Dorsey was overreacting and that perhaps his concerns are tied to Square’s own ties with bitcoin.

Square’s bitcoin predicament

In Q3 2021, revenue from fees generated by bitcoin bought and sold through its Cash App was $1.82bn, nearly half of total revenue of $3.84bn. In the first nine months, bitcoin revenue was $8.05bn of the $13.58bn total. For comparison, in the first three quarters of fiscal 2020, bitcoin revenue was $2.81bn – 44% of total revenue of $6.3bn.

The most recent earnings report revealed that the company had made a $220m investment in bitcoin over Q4 2020 and Q1 2021, which was worth $352m at the end of September.

Square’s exposure to bitcoin and reliance on fees from cryptocurrency trades is arguably a short-term headwind. With the price of bitcoin having fallen around 20% from its peak in recent weeks. With cryptocurrencies close to bear market territory, it’ll likely mean fewer people are using Cash App to trade bitcoin.

Bitcoin’s revenue growth rate in Q3 2021 was just 11%; it came in below the $2.47bn that Bloomberg analysts had forecast. It was also far below the mammoth 211% and 1,047% growth rates seen in Q2 2021 and Q1 2021 respectively.

Such is the impact that bitcoin is having, data from Zacks shows analysts expect Q4 2021 revenue to grow 25% year-over-year, which would be its lowest growth rate in some years. Revenue for Q1 2022 is expected to decline by 17% from the year-ago quarter.

Analysts call on Square

Square is doubling down on its bitcoin bid by looking for other crypto opportunities. The company takes a 2% cut of any bitcoin transaction made using Cash App, but it’s currently exploring the possibility of getting into the highly profitable bitcoin mining business.

Analysts remain bullish on Square on the whole, with 27 buy ratings, eight hold and one sell, according to MarketBeat. The consensus price target is $301.68, which implies an upside of 42% from the 26 November closing price.

However, there is caution regarding the company’s growth prospects in the near-term. As reported by Barron’s, MoffettNathanson analyst Lisa Ellis has cut her full-year EPS forecast from $2.07 to $1.57 – the Zacks consensus estimate is $1.67. The cumulative EPS for the first three quarters of 2021 was $1.44. Ellis also lowered her 2022 forecast.

Wolfe Research analyst Darrin Peller believes that the pullback in the Square share price provides a decent entry point for investors. In a note to clients seen by Barron’s, he said the stock’s downwards movement is “a clearing event” that presents “a buying opportunity.”