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Why Square Stock Was Up 23% in August

By Jon Quast – Sep 3, 2020 at 2:38PM

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The company's second quarter was better than feared, but the stock has pulled back because of a couple of ongoing concerns.

What happened

Shares of fintech company Square (SQ -5.59%) were up 22.9% in August, according to data provided by S&P Global Market Intelligence. Investors loved the company's results for the second quarter of 2020. That report kicked the month off, and shares just kept climbing.

Square stock has sold off some to start September, and investors do have lingering concerns. Specifically, there's concern about the health of the small and medium-sized business Square serves. And there are also questions about the company's Bitcoin-driven top-line growth.

SQ Chart

SQ data by YCharts

So what

In Q2, Square generated revenue of $1.92 billion and recorded a net loss of $11 million. Both numbers were ahead of what Wall Street feared, and the stock soared as a result. Besides the impressive 64% year-over-year top-line growth, investors cheered results from Square's Cash App. The Cash App alone generated $1.2 billion in revenue, up 361% from last year.

As is often the case in the COVID-19 era, Square's financials come with some asterisks. First, its seller segment declined in Q2. Seller revenue was down 17% year over year as the businesses on Square's platform processed less sales volume because of the coronavirus. Many of these businesses are brick-and-mortar operations.

Second, much of Square's Cash App growth came from bitcoin transactions. A full 73% of Cash App's revenue was bitcoin revenue. The problem is bitcoin isn't meant to be profitable; the company just wants to facilitate its adoption. As a result, it only accounted for $17 million in gross profit -- just 6% of the segment's gross profit.So Square's biggest top-line growth engine is also the one thing that doesn't directly benefit shareholders.

To summarize, investors liked Square's quarter and sent the stock higher in August. But a pullback isn't surprising given ongoing reservations about the business.

A dollar bill is folded into the shape of an upward pointing arrow.

Image source: Getty Images.

Now what

I think Square's long-term opportunity outweighs present concerns. Fintech stocks have performed so well in recent years because these companies are facilitating a real, tangible societal shift toward e-commerce and cashless transactions. Square remains a top company addressing this trend.

As we move beyond COVID-19, I would expect the businesses using Square to bounce back. Indeed, during this time, Square has been helping them develop a more omnichannel retail strategy, combining online and in-store operations. Regarding bitcoin concerns, I think investors should consider that Cash App Q2 revenue grew 140% year over year without bitcoin, which is still phenomenal growth.

Jon Quast owns shares of Square and Bitcoin tokens. 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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