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Why Square Inc's Shares Jumped 21% in August

By Travis Hoium – Sep 6, 2016 at 4:30PM

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Could profits be around the corner for this payment processor?

Image source: Square Inc.

What happened

Shares of payment processing company Square Inc (SQ -0.38%) jumped 21.1% in August, according to data provided by S&P Global Market Intelligence, after the company posted better than expected quarterly results.

So what

Second quarter gross payment volume jumped 42% to $12.5 billion and net revenue was up 41% to $439 million. Adjusted revenue was $171 million, up 54% from a year ago. On the bottom line, net loss was $27 million, but adjusted EBITDA was $13 million, and management said full-year EBITDA will now be $18 million-$24 million, up from a $14 million guidance. 

Management said that customers with payment volume of $125,000 to $20 million are adopting Square's payments, services, and financing at a rapid rate, which is leading to growth. If that trend continues, it could mean a move toward profitability as Square leverages revenue growth. 

Now what

Square has spent the last couple of years building out back office capabilities as well as bringing financing to customers. The investment has been costly, but it should make the company more attractive to customers who don't want to stitch together payment processors with hardware and software they need to run their businesses. Right now, the investment looks to be paying off.

Investors will want to watch for continued adjusted revenue growth and margin expansion as well. That's when investments in expanding beyond payment processing will truly begin paying off. Right now, there's evidence Square might be moving in the right direction.

Editor's note: A previous version of this article erroneously characterized the business that accounted for the difference between net revenue and adjusted net revenue as money-losing when it in fact generated a profit for the quarter. The author and the Fool regret the error.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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