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Square Follows in Twitter's Footsteps in Pulling Guidance

By Evan Niu, CFA - Mar 25, 2020 at 9:55AM

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The mobile payment processing company, which is popular among small businesses, is taking a hit from the COVID-19 pandemic.

Just a day after Twitter pulled its first-quarter guidance due to the COVID-19 pandemic, mobile payments processor Square (SQ -3.21%) has followed suit in updating its outlook in response to the public health crisis. Jack Dorsey serves as the CEO of both companies. With much of its business built on providing financial services to small and local businesses like coffee shops and independent retailers, Square is expectedly facing considerable risk, as many of those types of businesses are bearing the brunt of lockdowns of non-essential commerce as officials try to contain the virus.

Here's how bad things might get for Square in the near term.

Person using Cash App

The Cash App is holding up better than other parts of the business. Image source: Square.

Things were going so well

In the first two months of 2020, Square says it enjoyed "strong growth" and gross profit jumped 47% year over year thanks to momentum in the company's Seller and Cash App platforms. But then the novel coronavirus hit, with cases in the U.S. rapidly escalating throughout March. Over the trailing 10-day period as of yesterday, seller gross processing volume (GPV) plunged by 25%, with declines accelerating over the past few days.

The company's Cash App has been somewhat more resilient, with adverse impacts being "less pronounced," Square says. Originally conceived as a peer-to-peer (P2P) payment app, Cash App has expanded to include things like cryptocurrency and stock trading to compete with start-ups like Coinbase and Robinhood, among others.

Square is ratcheting down its net revenue forecast for the first quarter, which is now expected to be in the range of $1.3 billion to $1.34 billion -- a fairly modest reduction compared to the fintech company's original outlook of $1.34 billion to $1.36 billion. Gross profit should be $515 million to $525 million, down from the prior range of $550 million to $560 million. The estimate assumes continued deterioration in GPV as the quarter winds down with just a few days left.

Other metrics like adjusted EBITDA, GAAP net loss per share, and adjusted earnings per share will come in below guidance as well, although Square declined to provide specifics. For reference, here's the original outlook that the company provided for those metrics at the end of February.

Metric

Q1 2020 Guidance

Adjusted EBITDA

$95 million to $100 million

GAAP net loss per share

($0.03) to ($0.01)

Adjusted earnings per share

$0.16 to $0.18

Data source: SEC filings.

The company also hosted a conference call with analysts to discuss the update and released an investor presentation to highlight its long-term opportunities. Gross profit per seller continues to increase, as does the sheer number of active sellers. The seller ecosystem currently represents an $85 billion total addressable market (TAM) opportunity, Square estimates, and the company continues to address larger merchants and expand into new markets like cryptocurrency and stock trading.

Square also withdrew its full-year 2020 guidance, which called for net revenue of $5.9 billion to $5.96 billion. The company will provide more information in May when it reports first-quarter earnings results.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square and Twitter and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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