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Is Square a Buy After Third-Quarter Earnings?

Square (NYSE: SQ) reported third-quarter earnings that were a mixed bag. The majority of its business looked strong, but Bitcoin volume came in a little light and revenue suffered as a result. In this Fool Live video clip, recorded on Nov. 8, Fool.com contributor Matt Frankel and Industry Focus host Jason Moser discuss the company's results and what investors should keep in mind.

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Jason Moser: Matt, last week, Square reported their most recent quarterly results. This is a company clearly we cover pretty frequently on the show here. It's a company where a lot of our listeners own shares. You and I both own shares still in the company. It seemed like it was a good enough quarter. Now, you look at the stock, the stock was down almost 7% for the week.

Now, obviously, we don't invest on those types of short time horizons, but it's worth noting at least the sentiment for what seems like a relatively decent quarter. The market wasn't really buying the stock hand over fist. Let's go through some of your takeaways here for the quarter because because all in all, it does seem like the business continues to perform well, but maybe there were some signs of some slowing growth that have some investors concerned. What do you think?

Matt Frankel: Well, speaking of the slowing growth, the big headline is that Bitcoin revenue slowed down considerably from the second quarter.

Moser: Yeah.

Frankel: I've said before that Square's fascination with Bitcoin is probably my least favorite part of the company as an investor. Not like an anti-Bitcoin thing, it's going to be very volatile. It's not going to be predictable revenue. It's like how we were talking with trading revenue with investment banks, it's just really tough to predict from one quarter to the next. Bitcoin revenue was down significantly. They don't make a ton of money off that. But when you're doing billions of dollars in Bitcoin volume in a quarter, it's significant profit there. But elsewhere in the business, it's looking pretty strong.

Square's gross profit was up 39% year over year, one of the rare quarters where the Seller ecosystem actually outpaced the Cash App. Because it was compared to the third quarter of last year when things were still pretty shut down. Cash App revenue looking great, they rolled out a few new products. Square Capital, the business lending platform, remember they got their banking charter recently. They said that's approaching pre-pandemic levels, which during the pandemic, everybody was borrowing through PPP loans and things like that. They didn't have a reason to use Square Capital as much and now we're seeing that trickle back.

They launched a few different initiatives that I'm excited to see where they go. They expanded to France during the quarter. That's interesting. They set the second-biggest card payment market in Europe, pretty promising. They opened up Cash App to 13- to 17-year-olds with parent permission.

Moser: With all that I wanted to get your take on that because as you and I, both are parents. Your kids are a lot younger than mine.

Frankel: Yours are in that age group, aren't they?

Moser: They are. I wish that Square had done this two years ago. That was one of the bigger challenges when we were getting our girls into a banking relationship. There weren't really very many compelling options because Venmo and Cash App essentially you have to be of age to do it. Consequently, what we did is we initially got them started through Greenlight, which is that teen banking consortium. I think JPMorgan owns a good chunk of that. Ultimately, they have now transitioned into Capital One. Has a great checking account for students. You can sign up for it online. Great mobile app. You get your card and no issues there. Now, they're working with Capital One and their direct deposits go there. I have a hard time seeing them. You know how those banking relationships are Matt, they're sticky. Once you get in there, you start moving forward with that.

Frankel: Sure. I think this could be a brilliant move, in like 10 years. Here's why, the teenagers of today don't want Wells Fargo, they don't want Bank of America, they want Venmo and Cash App because it's cool.

Moser: Exactly.

Frankel: If you have to be 18 to sign up for Venmo and only 13 with a parent permission to sign-up for Cash App, you're landing these customers, say eight to 10 years before they get into their real earning years. You're building this relationship with these customers. Like you said, banking relationships can be very sticky. People don't change banks often. This could give them an edge with that demographic as they get into their earning years in the coming years. I really I'm a big fan of that. I have a list of stuff Square did this quarter, that's among my favorites. One of the less favorites is the Afterpay acquisition that's coming up.

Moser: We talked about that before and I agree with you. I think Cash App opening itself up to that 13-year-old and above demo, I think it's a great move. I just wish they did it sooner. I'd imagine we'll see Venmo doing something like that and shorter as well. But yeah, in regard to the Afterpay, it feels like that acquisition, you and I probably I think are coming at it from basically the same direction there. It's not Afterpay, but it's the price that Square paid for it.

Frankel: Yeah. I don't have a problem with them acquiring Afterpay, I have a problem with them paying $29 billion in stock to do it.

Moser: Yeah.

Frankel: Especially I think Square's stock price a little bit down since the announcement so they're diluting shareholders. I'm not a big fan of that price to pay. I think PayPal did it better in that case. They're doing bolt-on acquisitions to build out their buy now, pay later.

Moser: Yeah.

Frankel: Not just buying one that's already up and running. Because I don't think Square needs it. I don't think they need it $29 billion worth.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jason Moser owns shares of PayPal Holdings and Square. Matthew Frankel, CFP® owns shares of Bank of America, Square, and Wells Fargo. The Motley Fool owns shares of and recommends Bitcoin, PayPal Holdings, and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.


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