Square’s Services And Payments Volumes Are Sizzling – So Why Are Investors Skeptical?

Square continued its 2017 run of earnings strength with the release of its latest quarterly results on Wednesday (Nov. 8), notching growth in both payments volume and services revenue that came in ahead of analyst expectations.

But shares were still down 1.3 percent in after-hours trading, as investors seemed to take something of a step back from a year that has seen Square’s stock price expand by leaps and bounds.

“The main problem is that with the stock up 169 percent year to date, being priced for perfection would be an understatement,” wrote Nomura analyst Dan Dolev immediately after the report.

Notably, that 169 percent might be a lowball – CNBC is reporting that Square’s stock price is up nearly 200 percent in the past 12 months, after closing at an all-time high nine days ago.

Square’s outlook remains bright for the future – particularly as the firm sees its higher-margin services business growing exponentially year-over-year – and its merchant pool is increasingly expanding into larger sellers from its more traditional base of ultra-small SMBs.

“We are starting to get into segments that wouldn’t have been available a few years ago,” CFO Sarah Friar said in an interview.

By The Numbers

Square brought in $257 million in revenue – well ahead of analyst predictions of $244.9 million and a 45 percent increase over the same time last year. Earnings per share clocked in at $34 million or 7 cents a share, beating the analyst estimate for EPS of 5 cents a share.

Square’s gross payment volume (GPV) was $17.4 billion, ahead of the $17.03 billion forecast and a 31 percent increase over Q3 2016. GPV from sellers generated more than $125,00 per year in annual sales, accounting for 48 percent of total GPV.

In subscription and services-based revenue: Square’s Instant Deposit, its food delivery platform Caviar and its lending platform Capital brought in $65 million in revenue during the third quarter of 2017, and 84 percent year over year.

Net loss was $16 million in the third quarter of 2017, compared to a net loss of $32 million in the third quarter of 2016.

Based on its year-to-date performance, the firm is forecasting full-year adjusted revenue in a range between $963 million to $966 million, up from a previous range of $925 million to $935 million.

The Bigger Picture

Square’s results this quarter – particularly in its higher-margin services line – helped it continue its transition from strictly a payment company to a full-service set of solutions for small businesses.

“We started Square in February 2009 to enable businesses [sellers] to accept card payments, an important capability that was previously inaccessible to many businesses,” Square noted in its quarterly filing on its latter-day transition. “However, sellers also need innovative solutions to thrive, and we have since expanded [into] additional products and services to provide these businesses with access to the same tools as large businesses. Square is a cohesive commerce ecosystem that combines sophisticated software with affordable hardware that turns mobile and computing devices into powerful payments and point-of-sale solutions, enabling sellers to start, run and grow their businesses. We focus on technology and design to create products and services that are cohesive, fast, self-serve and dependable.”

And, of course, Square’s ambitions extend farther. This year, Square has already filed for an industrial loan company charter, which could save money by eliminating the need for a loan-origination partner. The charter would enable Square to raise deposits and give it access to that zero-cost capital acquisition, thus increasing the company’s flexibility to keep or sell loans and reducing its reliance on investors going forward.

Killer Stats

$303 billion: The total value of the 47,000 business loans Square underwrote, up 45 percent year-on-year

$17.4 billion: Square’s gross payment volume for Q3 2017

$2 billion: Total payments volume attributable to Instant Cash

10 million: Square’s revenue from hardware, up 23 percent year over year and slightly down on a sequential basis

44 percent: The year-on-year increase in sellers doing over $125,000 in transactions per year.

11 percent: How much of Square’s net quarterly revenue comes from services (a year ago it was 6 percent)

$999: The cost of the new Square register, its “one-stop PoS for SMBs”