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Square Q1 Earnings: Great Fundamentals, Bad Stock?

May 07, 2018 7:33 AM ETBlock, Inc. (SQ)V35 Comments
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General Expert


  • Square's rapid growth continued in Q1.
  • GAAP revenue growth was helped by the introduction of Bitcoin transactions.
  • Adjusted revenue grew 51%, so the core business is doing well regardless of Bitcoin.
  • Strength in the services business will enable Square to increase customer retention.
  • Valuation is a big concern for the stock. Square is not on sale yet.

Square (NYSE:SQ) printed decent Q1 numbers last week. Headline revenue and EPS both came in above analyst estimates and guidance was positive as well. Even though the company delivered on growth, with adjusted revenue up 51% year over year, I still have no appetite for the stock.

I am not overly bearish however. For a high growth stock like Square, it often just takes one bad earnings for investors to temper their expectations, followed by multiple compression (i.e. lower prices). Unfortunately for bears, I don’t see any meat that they can sink their teeth into in Q1.

Growth Continues

Square’s growth engine is firing on all cylinders. GAAP revenue rose 45% year over year from $462 million to $669 million, accelerating from Q4 2017’s growth of 36%. A major contributor was Bitcoin, which generated $34 million of sales in the quarter, or 739 bps of growth. If we exclude Bitcoin from revenue growth, Square still grew 37%, showing no sign of deceleration in its core business.

Adjusted revenue, a metrics that subtracts transaction based costs and Bitcoin costs (i.e. what the company bought it for) from GAAP revenue, showed a much stronger growth rate of 51%. While this Non-GAAP metric looks like one of those accounting tricks that the management uses to confuse investors, I actually think it is a reasonable gauge of the business. By subtracting extrinsic costs, investors can see a clearer picture of the company’s “core” revenue growth. Imagine if there is interchange fee increase that the company is passing on to its customers, GAAP revenue will see a jump, but adjusted revenue will not; this would be an accurate depiction of the business trend.

The payment processing revenue saw gross payment volume increase 31% year over year to $17.8 billion. Note that this lags the adjusted revenue and GAAP

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