As early August handed the stock market a vicious sell-off, Square (NYSE:SQ) stock fell harder than most. In the wake of a disappointing earnings announcement, horrified SQ stock investors endured the deepest two-day drop in the past three years.
The ongoing tariff war certainly didn’t help the Square stock price, but there has also been concern surrounding the sale of the company’s Caviar food-delivery business.
Are the doubters and short-sellers justified in their anxiety, or is this really just a buying opportunity in disguise?
No Caviar for Me, Thank You
Announcing the sale of Caviar wasn’t exactly what the mainstream media pundits wanted to hear, it seems. Characteristic of the negativity was Jeff Cantwell of Guggenheim, who went so far as to terminate his designation of “best pick” for SQ stock and, worse yet, to slash his price objective from $94 to $80. Ouch!
Why the negativity? According to Cantwell (speaking on behalf of Guggenheim), “We view this as Square hitting the reset button on an important part of its business model.” For their part, Square’s management countered with the statement that selling Caviar to DoorDash will provide “clarity in how we operate and a clearer purpose and alignment for our planning, investment, and work moving forward.”
Personally, I tend to concur with the company’s assessment of the Caviar divestiture. SQ is known as a payment app, plain and simple; I don’t see any particular need for Square to try to become the next Amazon (NASDAQ:AMZN) and be all things to all people.
Offering food delivery would have been a nice ancillary addition to the company’s business model, but I don’t see it as integral and as a prospective investor, I’m perfectly fine with Square sticking to doing what it does best. Besides, Square acquired Caviar in August of 2014 for only $44.3 million worth of stock, and then flipped it to DoorDash for $410 million worth of cash and stock — not a bad five-year turnaround, I must say.
Analyzing the SQ Stock Drop
You might recall the intense selling pressure surrounding Square stock on the day after the second-quarter earnings announcement; the share price tumbled 15%, and by the time the bleeding subsided, SQ was more than 30% below the stock’s 52-week high.
Besides the Caviar sale, investors were shaken by the company’s guidance, in which Square’s full-year outlook was lowered from a net loss of five cents to nine cents per share, to six cents to 10 cents per share. In other words, the expected losses are projected to be somewhat deeper than Square’s management had previously thought.
To focus solely that is a mistake, I feel, as there are other metrics to illustrate the company’s profitability. Take, for instance, Square’s adjusted Q2 earnings of 21 cents share, an astounding 61.5% increase compared to the same quarter from the prior year. Also consider that during that same quarter, Square’s revenues were $1.17 billion, signifying a very impressive 44% increase compared to the previous year; moreover, Square’s adjusted revenues for the quarter were $563 million, marking a considerable increase of 46% over the prior year.
Besides, the guidance disappointment might not tell the full story, as Square CFO Amrita Ahuja explained:
I’d urge you to remember that this quarter, we’ve announced the transaction with Caviar. And so we will update you post the closing of this transaction, which we’d expect to happen later this year, with respect to guidance for the rest of the year.
Thus, investors shouldn’t be surprised to see a “revision of the revision” in the near future when it comes to that seemingly disappointing guidance.
The Takeaway on Square Stock
Guidance isn’t everything, and losing Caviar isn’t the end of the world for Square; I’m standing by my overweight rating on SQ stock and am proud to say, “Good riddance, Caviar — I never had a taste for you anyway.”
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.