Square (SQ -0.99%) fell 18.1% in November, according to data from S&P Global Market Intelligence, because of disappointing quarterly results and declining Bitcoin market prices. Investors weren't impressed by Square's revenue growth, and the company's increasing exposure to cryptocurrencies also weighed on the stock, as Bitcoin (BTC 1.95%) had a volatile month.
Square's quarterly revenue growth slowed dramatically and fell short of analyst estimates. However, an accounting policy leads to somewhat misleading sales figures that don't really indicate the company's true performance.
When CashApp users purchase Bitcoin on the app, it is booked as revenue for the company, and the company incurs a cost of revenue that's nearly identical; there's only a 2% gross margin on those activities. Bitcoin purchases on the CashApp represented roughly half of the company's revenue, and they dropped about 33% from the prior quarter.
Outside of Bitcoin revenue, the company's top line grew 45% year over year, but only 3.7% quarter over quarter. Gross profit actually rose 43% year over year, though it shrank slightly from the prior quarter. Even if we adjust for the Bitcoin portion of the financial results, the sequential developments weren't encouraging.
It wasn't all bad news for Square. It's successfully gaining traction among larger sellers for its payment processing services. The $15.5 billion in payments for businesses that have more than $500,000 in annual sales is nearly double the amount from a year ago. The long-term investment narrative gets more intriguing if Square can blossom into an enterprise fintech disruptor, rather than a great tool for small businesses.
Square CEO Jack Dorsey stepped down from his other CEO position at Twitter (TWTR). The company also announced that it will rebrand as Block -- as in blockchain. The company is becoming a more diversified fintech leader, and it looks as if it's going all in on Bitcoin and blockchain tech. Square owns thousands of Bitcoins, and Bitcoin purchasing is one of the driving forces behind its CashApp business. It moved into the nonfungible-token space by acquiring Tidal earlier this year.
That's an exciting, forward-looking strategy, and it opens the door to tons of future growth. Nonetheless, this approach comes with some consequences, as the market has clearly connected Square's value to Bitcoin. The two have become correlated, so Square stock will rise and fall with the cryptocurrency market, regardless of performance. Volatile periods for Bitcoin will translate to volatility for Square.
After taking a beating in recent months, Square now trades at a price-to-sales ratio of 5.9. If you believe in Square's opportunity in the fintech space, that's a very reasonable valuation.