Payments company Square, Inc. (SQ) beat analysts' earnings estimates yesterday for its fourth quarter performance and boosted its Bitcoin (BTCUSD) holdings, but its stock fell anyway on a revenue miss.

The San Francisco-based company reported revenues of $3.16 billion, up from $1.31 billion a year earlier, on adjusted earnings per share (EPS) of 32 cents. Analysts had projected revenues of $3.22 billion and EPS of 24 cents. Square's gross profit was $804 million, against forecasts of $798 million. The gross payments volume (GPV), or the amount of cash flowing through its payments system, came in at $32 billion against expectations of $32.1 billion.

The company also boosted its Bitcoin holdings by purchasing 3,318 bitcoins worth $170 million during the fourth quarter. The latest purchase builds on its buy of $50 million worth of Bitcoin in the second quarter last year. The cryptocurrency now accounts for 5% of Square's cash and cash equivalent holdings.

Key Takeaways

  • Square has purchased an additional $170 million of Bitcoin. The payments company now holds over 8,000 Bitcoin, representing 5% of its cash reserves.
  • Square beat analyst estimates for earnings but posted a revenue miss.
  • The company's business strategy is increasingly pivoting toward Bitcoin as cryptocurrency becomes an important part of its revenue mix.
  • Analysts say that Square stock, whose price surged during the pandemic, may see more gains going forward.

Square has also made other commitments to the cryptocurrency, including funding the development of its infrastructure and launching a $10 million Bitcoin Clean Energy Initiative to support the development of green technology that reduces the environmental impact of Bitcoin mining. "We believe the internet needs a new currency, and we believe Bitcoin is it," said Jack Dorsey, CEO of Square, during the earnings call yesterday.

Square's stock fell 4.3% in extended trading yesterday and was down 4.5% in after-hours trading as the broader market took a hit. As of this writing, Square stock is changing hands at $236.33, a decline of 7.9% from the day's start.

A Doubling Down on Bitcoin

During the call, CEO Dorsey announced the company's intention to "double down" on its commitment to Bitcoin. That decision is not surprising considering that the cryptocurrency is increasingly becoming an important part of Square's revenue mix.

Approximately 81% of the $2.17 billion in revenue generated from the Cash App – a peer-to-peer payments platform for trading stocks and sending and storing money – came from Bitcoin-related transactions in the fourth quarter. According to Square, 3 million users of the app bought or sold Bitcoin in all of 2020, and more than 1 million used Cash App to trade the cryptocurrency in January alone.

"Bitcoin revenue and gross profit benefited from an increase in Bitcoin actives and growth in customer demand, as well as a significant year-over-year increase in the market price of Bitcoin," the company stated in a press release. The income for Square from these transactions is not substantial since its margin cut includes conversion costs from cryptocurrencies to fiat currency. Even though Cash App reported an increase in revenue of 502% from the previous year, its gross profit rose by only 162%. In numbers, Bitcoin revenue from Cash App totaled $1.8 billion, and gross profit was $41 million during the fourth quarter of 2020.

The app itself has become the main driver of Square's revenues, accounting for almost 69% of the total revenue generated during the fourth quarter. There were 36 million Cash App users in 2020, and its customer numbers received a boost after government stimulus checks, distributed during the pandemic, were disbursed through it. The company's other division, Seller, which provides payment services to small businesses, reported $987 million in revenue.

Despite the pandemic, which crashed demand from its customer base of small businesses and retail establishments, Square's stock has skyrocketed by approximately 210% in the past year. But it may be primed for a correction, according to some analysts. "Gains going forward [for the stock] are likely to be more modest," wrote Timothy Willis, an analyst at Wells Fargo. Willis said that investors had already factored in the growth prospects for Seller and Cash App in current valuations and cut the firm's rating on Square stock to "Equal Weight" from "Overweight."