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Why Square Stock Dropped After Q3 Earnings

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This fintech company fell short of Wall Street's expectations.

Square (SQ 0.52%) makes the economy more accessible. Its portfolio of hardware, software, and services simplifies commerce for sellers, syncing sales across digital and physical stores. And its mobile app, Cash App, simplifies finance for users, making it possible to deposit, spend, and invest money from a single platform.

Notably, CEO Jack Dorsey has long been bullish on Bitcoin, and in 2018, the company made it possible to trade Bitcoin through the Cash App. That decision helped boost user engagement, accelerating the financial performance of the Cash App ecosystem. However, it also tied the company's financial performance (to some extent) to the price of Bitcoin.

In this Backstage Pass video, which was recorded on Nov. 5, 2021, Motley Fool contributors Taylor Carmichael and Brian Withers discuss Square's third-quarter earnings, focusing on the impact of Bitcoin and the company's Cash App growth initiatives.

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Taylor Carmichael: It's a disappointing quarter for Square, especially compared to last quarter. Last quarter, revenue growth was a 143%. This quarter, it was 27%. That's a dramatic change in revenue growth. They missed their estimates for the quarter, too. The thing to remember about Square is, because there's a quirk with accounting, a lot of that revenue is counting Bitcoin. The Bitcoin that they are holding, that they're trading as part of their trading. It's a quark of accounting, and it can be a little difficult to follow Square, in that sense, I think.

I feel like crypto is very important with Square. The change in crypto trading in Q3, I think, is probably in regard to why they missed. But overall, I think they had a really good quarter. It's just that their numbers look different because of the severe ups and downs that we see with Bitcoin and crypto in general.

Their net income for the quarter was $233 million. Adjusted EBITDA up 29% -- that was a beat. Their outlook, they held steady. The stock's down 4% today. Let's get into their ecosystems: Seller gross profit was $606 million for the quarter, up 48%. The big thing this quarter is, they're expanding into France. So they're still expanding the Seller apps, and they have very strong network effect both in Cash App and in Seller. These are two powerful, and they are separate. They're trying to bring them closer and closer together, these two different and very strong platforms that they have.

Cash App gross profit was $512 million in the quarter, up 33%. What they're doing in Cash App is they're adding teens. That's interesting because there's, I think, 20 million teens in the US that you got to get permission from your parents. But teens will soon be able to start using Cash App because of that. It was interesting, too. There was a question on the call if they're ever going to trade other crypto, and they have no interest in that. They are all in on Bitcoin.

And if you think about it, Square is really, I think, key to the success of cryptocurrency, and to the success of Bitcoin in general. They were the strongest proponent, the earliest proponent. PayPal came on board, and that changed it, too. But Square was very early on crypto, and you have to say the Dorsey has been very right about crypto, about how it's going to expand and be more and more important. I'm a big fan of Dorsey. This is one of my favorite stocks. It's been a great stock for my family. The quarter is a bit down. Bitcoin was bit down last quarter, and it's already shot back up this quarter, so I would expect their numbers to be fantastic in Q4. The Afterpay merger is closing in Q1. They haven't really talk about that much on the quarter, but all things going forward with the Afterpay merger and that's pretty much it.

Brian Withers: The Bitcoin thing was always a headscratcher for me. I think part of it was Jack Dorsey wanted to make Bitcoin accessible to people who wanted to get access to it. I think a lot of their success in Cash App relied on the popularity of Bitcoin. It will be interesting to see if this sole focus on Bitcoin, and now that there's other cryptocurrencies out there that people are interested in owning and trading, whether that is a long-term headwind for Cash App or not. I actually like them opening it up to teens. If you think about getting a bank account for your kids, what a better way. It's going to be an app these days. Nobody is going to have a pass book like we did when we were kids. I think it's good for them to play in that space.

Trevor Jennewine owns shares of Square. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Bitcoin, and Square. The Motley Fool has a disclosure policy.

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