This is difficult. The Square ( SQ) is aggressive, which I like. But, I just can't do it.
I am just not so sure about the firm's direction, or corporate allocation of resources. We'll move on from here and try to explain. Mind you, while I am no bitcoin bull, I do see a current utility in the cryptocurrency. I also see a desperate need for globally coordinated regulation, and the eventual replacement of independent cryptocurrencies by actual fiat currencies in a blockchain-style format that will rob these cryptos not only of much of their utility, but also their allure. I don't know how far this goes, but I do see this as a scarcity-driven bubble.
Typewriters are scarce now too, just not very useful. Once global central banks and sovereign treasury departments decide to stamp out the competition, that competition will have to exist only in the most lawless corners of the earth. Crazy? Maybe, but that is a risk, a very realistic risk, no matter how many mainstream corporations try to jump on the bandwagon Wednesday or even Thursday.
For the fourth quarter, Square reported adjusted earnings per share of $0.32, which beat consensus view. The firm also posted revenue of $3.16 billion. Not only did this beat Wall Street's estimate, but was good enough for a very impressive annual growth of 141.2%. The firm had more than 36 million transacting "cash app" monthly active customers in December, up more than 50% year-over-year. Bitcoin revenue of $1.76 billion was indeed up almost tenfold for the same period a year earlier. Bitcoin profit of $41 million ran 13-fold. The firm tells investors in the material released last night that during the fourth quarter, they saw more customers adopting Bitcoin on their first day of onboarding than anytime before. For the month of January, more than a million customers purchased bitcoin for the first time.
It's not all bitcoin. Fourth quarter cash app ecosystem gross profits ran 162% year-over-year to $377 million. Cash app revenue screamed 502% higher to $2.17 billion. Cash app revenue ex-bitcoin printed up 127% at $416 million.
The Cash Box
Square ended the fourth quarter with $4.4 billion in cash, cash equivalents, restricted cash, and investments in marketable debt securities. The firm also announced the purchase of $50 billion in bitcoin back in October, as well as an additional $170 million in bitcoin announced yesterday.
Now, $220 million out of $4.4 billion is not really so much ... roughly 5% of a net cash balance.
Still, this is a risk. As I look over the firm's balance sheet, I see total assets of $9.869 billion,and total liabilities prior to including shareholder equity of $7.187 billion. Pretty decent on the surface, and maybe it is truly great. I could be wrong about bitcoin and I understand that. That said, in the total assets number is at quarter's end $2.037 billion in customer funds and $316 million in goodwill. Well, it stands to reason that if so many customers are onboarding with bitcoin purchases, does that not only make this number quite volatile going forward, and thus very risky. Not to mention potential impact on goodwill. The firm tells you in last night's fine print that accounting rules for bitcoin require the firm to recognize any decrease in market price below cost as an impairment charge, with no upward revisions should the market price improve until a sale is made.
Sound to me like the balance sheet not just for Square, but for any company getting heavily involved in allocating cash resources toward cryptocurrencies will have to adjust earnings every quarter forever, and could make for a volatile balance sheet. It's not like you can just double or triple goodwill in order to just make it all work, right?
The Square Deal
I have not heard of any way that Square is hedging bitcoin risk, and I am not sure that there is an effective way to do so. Even bitcoin bulls, and I am more a bitcoin skeptic, would have to admit that with this investment comes exponentially increased risk. That might be fine for someone who is OK with such exposure, but it's not OK for me, nor for any public company I might think about investing in.
... At least not until the central banks and treasury departments decide to take a pass on fighting over power already partially lost. I never say never. Part of being a trader is recognizing when you are wrong and changing course. For me, right now ... Square is a hard pass. Even on this dip.
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