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Why Square Stock Jumped Today

By Evan Niu, CFA – Apr 9, 2020 at 1:10PM

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Regulators clarify how the small business rescue package will work, while allowing companies like Square to participate.

What happened

Shares of Square (SQ 0.61%) have jumped today, up by 5% as of 12:30 p.m. EDT, after the U.S. government clarified aspects of the stimulus program designed to help small businesses, including opening up the program to fintech companies like Square. The payment processor's customer base is highly concentrated in small local businesses that are getting hit hard by the coronavirus outbreak.

So what

Financial regulators have determined that banks would not need to maintain capital against loans provided under the small business rescue program, according to Reuters. That should ease reserve requirements and make it easier for small businesses to obtain loans to help weather the crisis.

Square payment terminal in a small business

Image source: Square.

Additionally, fintech companies like PayPal, Square, or Kabbage -- among others that are not traditional banks -- are now eligible to participate in the $350 billion program, providing even more alternatives for local businesses to get a lifeline.

Now what

Square's customer base is largely made up of of small businesses, with over 70% of sellers processing $500,000 or less in annualized gross payment volume (GPV) as of the fourth quarter. Square already provides small-business loans through Square Capital, its lending arm.

Separately, CEO Jack Dorsey recently pledged to donate $1 billion of his Square equity to help fund global COVID-19 relief. Any funds that are left over after the world defeats the virus will be allocated to girls' health and education, as well as universal basic income. That donation represents nearly 30% of Dorsey's net worth.

Square withdrew its 2020 guidance last month due to coronavirus uncertainties, and said yesterday that it would report full first-quarter earnings results on May 6. The company's revised guidance for the first quarter calls for revenue of $1.3 billion to $1.34 billion.

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

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