Key Takeaways

  • Analysts estimate EPS of -$0.05 vs. $0.21 in Q2 2019
  • Gross payment volume is expected to plunge.
  • Revenue expected to decline modestly despite COVID-19.

Square Inc. (SQ) is feeling the negative financial impact of the pandemic-induced economic downturn even as its shares are dramatically outperforming the stock market. The financial services company, co-founded by Twitter Inc. (TWTR) CEO Jack Dorsey, specializes in processing transactions between merchants and their consumers. And Square's transactions these days are plummeting amid the global slowdown, hurting its main source of revenue.

Investors will be watching to see how badly these forces are hurting Square when it reports earnings on August 5, 2020 for Q2 FY 2020. Analysts expect Square to report its second straight quarter of losses on declining revenue.

Investors also will be watching a key Square metric in the Q2 report that reflects transaction volumes: gross payment volume (GPV). GPV is Square's main gauge of the total dollar amount being transacted through its payment ecosystems. Analysts expect GPV to plunge 29.8%, the first quarterly decline in at least four years.

Despite these negative forecasts, Square's stock has tripled from its March 2020 lows. Over the past 12 months, the company's shares have provided investors with a total return of 54.0% compared to the S&P 500's total return of 6.5%. All data is as of July 28, 2020.

One Year Total Return for S&P 500 and Square
Source: TradingView.

Square's stock has risen sharply despite reporting disappointing Q1 FY 2020 results on May 6. The company posted its first loss since going public in 2015, reporting adjusted earnings per share (EPS) of -$0.02. That was a dramatic turnaround from adjusted EPS of $0.12 a year earlier in Q1 FY 2019. Despite this, Square reported a 44.0% increase in revenue, which was consistent with growth rates posted over the past few years.

The company gave a major warning sign to investors in its Q1 report. It said that its Seller ecosystem, which provides financial services to merchants, experienced a significant downturn in the last two weeks of the quarter due to COVID-19. This happened even as Square's Cash App ecosystem experienced higher volumes, posting in April the best month ever for net-new transacting customers, peer-to-peer volumes, Cash Card spend, and other services.

Even with Cash App's success, analysts are forecasting a dismal Q2 FY 2020, with the company posting widening net losses. They estimate adjusted EPS of -$0.05, more then double the size of the loss in Q1. Revenue is expected to fall 2.2%. This would be the first revenue decline since Square went public, and a stark contrast to the robust revenue growth rates ranging between 41-51% posted in each of the past eight quarters.

Square Key Metrics
  Estimate for Q2 2020 Actual for Q2 2019 Actual for Q2 2018
Adjusted Earnings Per Share ($) -0.05 0.21 0.13
Revenue ($M) 1,148.0 1,174.2 778.0
Gross Payment Volume ($B) 18.8 26.8 21.4

Source: Visible Alpha

As indicated, many investors will look closely at Square's gross payment volume, or GPV, which measures the total dollar amount of transactions processed by sellers using Square as well as certain peer-to-peer payments via the Cash App. GPV is a key measure of the company's success in an increasingly crowded payments industry, which includes rivals like PayPal Holdings Inc. (PYPL) and credit card providers like Mastercard Inc. (MA).

Square's GPV grew 14.0% year over year (YOY) in Q1 FY 2020, marking the metric's slowest growth since the company went public. The slowdown was consistent with the general deceleration that has taken place over the last four years: GPV growth for the four quarters of 2016 ranged between 34-45% YOY and slowed to between 25-27% YOY in 2019.

That growth trend may reverse in Q2 FY 2020. Analysts' estimate for a 29.8% decline in gross payment volume represents a startling 55 percentage point swing from 25.3% growth in Q2 2019. That massive deterioration in the major metric fueling Square would have nothing but negative implications for the company's earnings, revenue, and its investors.