Inside the Numbers
In Q1, Square reported earnings per share of $0.41 which beat expectations of $0.16 per share by a significant margin. Revenue came in at $5.1 billion vs $3.4 billion consensus expectations. This was a 266% increase from last year's Q1 with most of the gain attributed to crypto-trading revenue.
Gross profit for Cash App was $495 million, a 171% year over year gain. Bitcoin accounted for $3.5 billion in revenue, a 1000% increase from last year. However, it only accounted for $75 million in gross profit due to the low margins on this revenue.
Bitcoin is now firmly enmeshed in the company's strategy. It's a "flytrap" that can attract users to the platform and get them using it on a daily basis. Over time, the company believes it can successfully extract increasing amounts of revenue per user by offering different products and services.
On the conference call, CEO and founder Jack Dorsey said, "Our focus, first and foremost, is on enabling...bitcoin to be the native currency. It removes a bunch of friction for our business. And we believe fully that it creates more opportunities for economic empowerment around the world." As part of its bitcoin strategy, Square has bought $220 million worth of bitcoin on its balance sheet which has more than doubled.
In terms of guidance, the company anticipates gross profit growing by more than 135% and by approximately 130% year over year for its Cash App. It did warn that growth rates will moderate in coming quarters due to tougher comps.
Stock Price Outlook
Square was one of the hottest momentum stocks in the market from March 2020 to mid-February. The adoption of digital wallets exploded with the world going remote. Another catalyst was the company's embrace of crypto-currencies which also associated the stock with bitcoin.
Since its peak, shares are down nearly 20%. Now, Square is going to face some tough challenges. Growth will likely slow as the world returns to normal. Crypto-currency trading has brought a surge in revenue but margins are extremely tight. As a result, the company's profit margins have been steadily declining which could affect its multiples.
Long-term, the digital wallet revolution is going to be a massive disruptor for the economy, and Square is well-positioned. However, in the near-term, investors should remain patient and wait for lower prices.