Is Square Stock just a Bitcoin Story?

Bitcoin has come back pretty well in 2020. The cryptocurrency recently broke through to all-time highs, surpassing its peak in 2017 of around $ 20,000. He currently sports over $ 23,000 a penny. Square (NYSE: SQ), the fintech company known for point-of-sale (POS) and peer-to-peer (P2P) solutions, has made a number of investments and announcements involving bitcoin, possibly leading investors to think it should Both warranties move in parallel.

However, this feeling could not be further from the truth. Bitcoin has no direct impact on Square’s business (at least, not yet). Here’s why.

A coin with a Bitcoin logo on a circuit board

Image source: Getty Images.

What does Square do

Square has made a few investments in the crypto space. The best known was in early 2018, when it started letting Cash App users buy and sell bitcoin. This was not revolutionary (plenty of other services let you buy cryptocurrencies), but it was treated as a marketing tool. It’s probably a big reason why the consumer-focused personal finance app has quadrupled its user base over the last three years.

Another initiative involves a dedicated team of employees called “Square Crypto” that helps build “open source projects aimed at making bitcoin the planet’s preferred currency.” That is a bold mission statement – but with only six employees at the moment, this is unlikely to have much of an impact on Square’s bottom line anytime soon.

The company finally announced in October that it was buying $ 50 million (at the time) worth of bitcoin, or 4,709 coins. It is difficult to determine why the company chose to do this, but noted that the purchase was made to help “expand” its balance sheet. Priced at $ 23,500, the bitcoin on Square’s balance sheet is worth just over $ 110 million today. Considering Square’s market cap currently exceeds $ 100 billion, the returns on its bitcoin holdings are irrelevant.

Why he’s overcompensated

Every quarter, Square tells investors how much revenue it is bringing in from bitcoin. This number ballooned in the third quarter to $ 1.6 billion, leading to article headlines talking about Square Square’s 1,000% revenue growth in bitcoin. While these pieces can get a lot of clicks, they are actually quite misleading. Whenever Square buys bitcoin for its users, it is forced to count it as revenue, though the margin it makes is negligible. In fact, out of the $ 1.6 billion in bitcoin “revenue” Square brought in last quarter, only $ 32 million turned into gross profit.

With bitcoin revenue inflating Square’s top line (it accounted for over 50% of sales last quarter), investors really shouldn’t be paying attention to it. Instead, they should focus on evaluating what Square can do with bitcoin to drive usage other products that generate real money for his business. For example, Square has just announced that Cash App users could earn bitcoin through the Cashback Card feature (the debit card of the app). Again, the company will make negligible profits on the bitcoin it gives, but hopefully it will incentivize consumers to spend more with its debit card, a product that generates real profit.

Think of these bitcoin features as an efficient marketing tool, but not as something the company will make money on – at least not in the next few years. It may be exciting to see the price of bitcoin soar, and those price increases may cause Square’s share price to move in the short term. However, at the moment bitcoin prices do not affect the underlying business, and that is what will drive the stock over the long run.