Square, Inc.'s (NYSE:SQ) stock is trading almost 19% up in pre-market trading today. The company released its extraordinary earnings result for the second quarter of fiscal year 2016 (2QFY16) yesterday, along with FY16 guidance, boosting investor confidence in the company.
The payment processing firm posted revenue of $439 million, an increase of 41.5% year-over-year (YoY) and 7% more than analysts’ estimates, while gross profit stood at $424.5 million, a rise of 96.8%.
The company stated in its shareholders’ letter: "We are pleased with our second quarter results, which highlight strong growth at scale and a significant profitability milestone. Gross Payment Volume (GPV) for the second quarter was $12.5 billion, up 42% year over year."
The new guidance by the company further boosted investor confidence as the company now expects FY16 net revenue to be in the range of $1.63 billion and $1.67 billion. The company also said that its total net revenue growth might be impacted by the drop in transaction revenue from Starbucks, after the coffee company shifted to a new payments processor.
Year-to-date (YTD), Square’s stock is down by 18.31%, but has risen by more than 12% in the last one month. Morgan Stanley restated an Equal Weight rating on the stock, giving it a price target of $10. On the other hand, Piper Jaffray has given a Neutral rating to Square and a price target of $10.
The jump in the company’s stock price in the last month can be linked to its global expansion plans. Square has already incorporated Square Europe and looks set to expand in the continent. Now, a bigger audience will be able to get access to the well-researched products of the company.
The company has not managed to control its operating expenses, and if it plans to grow at a fast rate, it must increase its revenue and cut down on its expenses. The company’s sales growth rate in the last seven quarters has been more than 40%, while for 2QFY16, the sales growth was reported to be 41.46% and the operating expenses growth was 49% YoY.
Square had been making net losses since its initial public offering, which can be attributed to a high-growth phase during which it invested most of the money it made. Its net loss for 2QFY16 stood at $27.3 million.
The company aims to target the online loan market, but JP Morgan warns that it can soon encounter a slump in the credit cycle of small businesses. The bank has also warned it of possible challenges in funding merchant cash advance. According to the Wall Street Journal, Square may make its Square Cash service available to customers via messages by the end of this year.
Square's business revolves around creating useful products which can help small businesses market their products and get financing easily. The first quarter earnings of the company were poor, which caused its stock to drop by 22%.
Square got listed in mid-November 2015 and its IPO was one of the most anticipated ones of the year. Its CEO, Jack Dorsey, is widely known as a co-founder and CEO of Twitter, and as the founder and CEO of Square.