Square’s Quarterly Profit Growth Has All But Disappeared

Stock (Symbol)

Square (SQ)

Stock Price


Data is as of
December 7, 2021
Expected to Report
February 21
Company Description
Square enables its sellers start, run and grow their businesses. It combines software with hardware to enable sellers to turn mobile devices and computing devices into payments and point-of-sale solutions. Once a seller downloads the Square Point of Sale mobile application, they can take their first payment. With its offering, a seller can accept payments in person via magnetic stripe (a swipe), Europay, MasterCard, and Visa (EMV) (a dip), or Near Field Communication (NFC) (a tap); or online via Square Invoices, Square Virtual Terminal, or the seller’s Website. Once on its system, sellers gain access to technology and features, such as reporting and analytics, next-day settlements, digital receipts, payment dispute management and chargeback protection, and Payment Card Industry (PCI) compliance. On the consumer (buyer) side, Square Cash offers individuals access to a way to send and receive money. Source: Thomson Financial
Sharek’s Take
David SharekSquare’s (SQ) profit growth has all but disappeared. Last qtr, qtrly profit growth decelerated to just 9%, down from 267% 2QtrsAgo. For a “growth stock” that’s a warning sign. And the stock’s been punished the past qtr, from $272 to $180 (-34%). In addition, qtrly profit growth got slashed, with analysts now estimating -19%, -15% and -27% growth for the next three qtrs, with Fiscal 2022 profits now expected to climb just 9%. Outside of profit growth, most of Square’s growth rates were outstanding:

  • Company Revenue: +27%, year-over-year.
  • Seller revenue: +44%.
  • Cash App revenue: +16%.
  • Bitcoin revenue: +11%; accounted for 47% of total revenue.
  • Transaction-based revenue: +40%; accounted for 34% of total revenues.
  • Subscription and services-based revenue: +55%; accounted for 18% of total revenues.
  • Hardware revenue: +36%; accounted for 1% of total revenue.
  • Gross Payment Volume (GPV): +43%.
  • Cash Card Actives: +70% more inflows.

Electronic payment processor Square pioneered credit card processing for mobile payments, then expanded its reach to bring new technologies and business lines to retailers around the world. The company is a well-rounded payment processor with various tools for getting business done. Square Banking offers financial products such as deposit accounts, Square savings, Square checking, Square Loans, and Square Payroll.  Square had been blossoming as Bitcoin and Cash App were the two catalysts propelling the stock higher, with a up-and-coming third catalyst in the pending acquisition of Afterpay, a leader in “buy now, pay later”. Here’s a briefing of each of Square’s catalysts:


  • Square is a payment processor, charging businesses a ~2.75% transaction fee. A key feature of Square is Instant Deposit, which lets merchants get paid in minutes instead of waiting three days for payments to clear.
  • Square Terminal is a credit card machine for retailers that has a display to show customers the items being purchased, takes payments via credit card or mobile phone, prints receipts, and comes with Wi-Fi internet connection that restaurants can use to have customers pay at the table. Other forms of point of sale hardware include Square Register, Square Stand and Square reader.
  • Square Payroll is an online payroll service for small businesses. Employees clock in from the Square App, and have their paychecks directly deposited into their accounts.
  • Square Card is a free debit card that allows businesses to pay online, in stores, or get cash from an ATM. The company recently launched Square Messages, a feature that allows sellers to text and email buyers.
  • Square Loyalty lets users of the Cash App receive rewards from retailers the consumer does business with.
  • Square Invoices Plus, a subscription-based offering designed for larger businesses with complex operations.

Cash App:

  • Cash App is a mobile phone app that allows people to send and receive money. Cash App is a banking app, that lets people receive paychecks, tax returns, and other direct deposits. Square allows investors to buy stocks and Bitcoin on its Cash App.
  • Cash Card is a free debit card that lets people pay online and in stores. In the March 31 shareholder letter, management stated Cash Card had the greatest scale of any Cash App product, with 10 million Cash Cards active and 7 million customers using the card on a weekly basis. In March, Cash App began allowing customers to sent bitcoins to friends.
  • Loans gives loans to businesses, which are then paid back via automatic deductions from daily sales. Since credit card receipts are run by Square, the company can look at a retailers finances and give them a loan.
  • Square Financial Services will provide small-business loans and then sell these loans to third parties.
  • In the U.S., the company recently expanded Cash App offerings to teenagers with parental permission. This new market represents 20 million people in the U.S.
  • Last qtr, the company launched Cash App Pay where customers can easily pay at any Square sellers by scanning a QR code or tapping a button on their mobile device.


  • On August 1, 2021, Square announced plans to buy Australian buy-now, pay later company Afterpay for $29 billion in stock. Afterpay has a unique business model where consumers can signup within a few minutes, make online purchase, and repay in four equal installments without the need of credit check. Square plans to integrate Afterpay into its existing Seller and Cash App.
  • Management believed that the acquisition of Afterpay will significantly integrate 16 million Afterpay consumers to Cash App and bring Square Sellers to Afterpay’s Buy Now Pay Later offering.
  • The “big picture” with Afterpay is that Square can eliminate Visa and MasterCard as middlemen because consumers could buy via a Square terminal using their Cash App and then finance it through Afterpay.
  • After this acquisition was announced, investor interest in the BYPL segment surged, and competitor Affirm’s stock shot up from $57 to $163 from August to October 2021.
  • The SQ and Afterpay deal is expected to close in the first qtr of 2022.

Square has so much potential as its disrupting the banking industry. Traditional banks are inefficient with their expensive branches and banking is starting to go digital. I continue to believe someday Square will become the biggest online bank in the world. Last qtr the company expanded into Europe by entering France, the 2nd largest card payment market in Europe. I think we are in a time where Square will do to banking what Tesla did to the automobile industry. Square is part of the Growth Portfolio. I think this is a core holding but the stock is hard to get a Fair Value valuation on.

One Year Chart
Now, there’s more to this stock’s drop than the slowdown in profit growth. The stock market has been hard on growth stocks. Last week, aggressive growth stocks got hammered. Is SQ an aggressive growth stock? I think its more of a traditional growth stock as the company is large and established. But a 97 P/E is high for a “traditional growth stock”. SQ could continue to tumble. The low might be 65x 2022 profit estimates, which is $120. But I’m not a seller of the stock, as there is loads of growth opportunity via multiple avenues. The current P/E of 97 is lower than the 142 P/E 2QtrsAgo, 174 3QtrsAgo, and 186 4QtrsAgo. I’ve reduced my Fair Value P/E the past three qtrs as well (from 200 to 150 and now 125).

The Est. LTG of 48% is outstanding but is down a bit from 54% last qtr.

Earnings Table
Last qtr, Square delivered 9% profit growth and missed estimates of 18%. Company revenue increased 27% while transaction-based revenue accelerated 40%, subscription-based revenue jumped 55%, and bitcoin sales increased 11%, year-over-year. GPV climbed 43% to around $45 billion. 

The sales increase was fueled by strong demand in both card-present and online channels in Seller business, due to increased in-person activity and online transactions, and strong customer engagement in Cash App business, due to growth in number of business accounts and transactions, growth in inflows, and stability in bitcoin price.

Annual Profit Estimates decreased this qtr. By a lot! The estimates for the upcoming years continue to be outstanding:
2021 $1.71
2022 $1.87
2023 $2.80
2024 $3.44
2025 $4.69

Qtrly Profit Estimates are for -19%, -15%, -27%, and 27% profit growth rates the next 4 qtrs. Square’s qtrly profit growth has all but disappeared

Fair Value
Last qtr, I reduced my Fair Value P/E from 200 to 150. This qtr I’m reducing it to 125. Honestly, its tough to get a true “multiple” for this company, as it’s a unicorn.

With the stock’s current P/E of 106, the stock offers 29% upside to my 2022 Fair Value of $233 (since we are in SQ’s Q4 I’m looking ahead to next year).

The stock has great upside to my 2023 Fair Value (95%) but I wouldn’t read to much into this as I think this stock is tough to put a target price on.

Bottom Line
Square (SQ) just completed a parabolic run, has corrected, built a base, and has digested its gains. Most recently, the stock has tumbled lower. Note there isn’t a support level here. So the stock could continue to decline.

This company has a lot going for it. I think business checking holds a lot of untapped opportunity. I really like Cash App. Bitcoin is delivering tons of revenue. And now the Afterpay acquisition looks to be a perfect addition to the company.

SQ moves down from 8th to 12th in the Growth Portfolio Power Rankings. The stock was ranked too high in this portfolio.

The stock will be added back into the Aggressive Growth Portfolio where it will rank 7th in the Power Rankings. I feel SQ stock can bounce back to the prior range between $200 and $270 in 2022.

Power Rankings
Growth Stock Portfolio

12 of 32

Aggressive Growth Portfolio

7 of 32

Conservative Stock Portfolio


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