Square Surges as Earnings Show CEO Isn't Distracted by Twitter Role

The following article, originally published at 5:52 p.m. on Tuesday, November 1, was updated with comments from analysts and executives.

Investors anxious about whether Jack Dorsey's return to the top job at Twitter (TWTR)  was hindering his work as CEO of payment-processor Square (SQ) had some of their worries allayed by the firm's quarterly earnings report.

The San Francisco-based finance business reported a loss of 9 cents a share for the three months through September, smaller than the 11-cent loss estimated by analysts in a FactSet survey, while payment volume climbed 39%. The company is still working to end its agreement with premium coffee chain Starbucks, which was initially touted as a positive but proved unprofitable and has taken longer to dissolve than anticipated.

Shares of the payment company climbed almost 4.8% to $11.60 on Wednesday, curbing the year-to-date loss of 11%. The broader S&P 500 rose in the same period.

Dorsey, who has been criticized for attempting to lead both Twitter and Square simultaneously, told CNBC last month that the businesses of both companies --- communications and commerce -- are "foundational" and he has no problem moving between his roles.

Society has complicated the two industries, and "our goal is to make it a whole lot easier," he said. "I don't really consider it a shift."

Square's revenue excluding Starbucks (SBUX)  climbed 51% to $178 million, higher than projections of $172.6 million, as hardware and software sales buoyed strong income from payment processing. 

On a net basis, including the costs of its Starbucks deal, Square reported a loss of $32.3 million. The coffee chain's impact on sales in the remainder of the year should be "nominal," Square said.

Keefe, Bruyette & Woods analyst Steven Kwok maintained a market perform rating on the stock, the equivalent of a neutral, noting that investors' "high expectations" are already reflected in the stock price.

"If the company is able to execute on delivering new products to the market and expanding globally, there could be further upside to revenue growth in the future," Kwok said in a note to clients.

Gross payment volume of $13.2 billion in the third quarter was bolstered by a 55% increase in "continued momentum" from larger sellers, who now make up 43% of the total, the company said. 

Such businesses -- like Vosges Haut-Chocolat, which has six stores -- represent an important market for Square. Recognizing their "more complex needs," the payments firm has "made changes to our website onboarding process to allow sellers to self-identify their sales volume, industry, and other characteristics," executives wrote to shareholders.  

Sophie Gatins, marketing manager for the chocolatier, said Square has given her company more flexibility while making it easier to track supplies.

EXCLUSIVE LOOK INSIDE: Starbucks is a holding in Jim Cramer's Action Alerts PLUS charitable trust portfolio. Want to be alerted before he buys or sells the stock? Learn more now.

It's especially helpful "when we get into our busier seasons, and we've got limited-edition products and we need really quick insight into those inventory levels," Gatins said in a phone interview. "Every business is going to have an eye on the bottom line, and Square was a really good option from that standpoint."

One significant area of growth for Square in the third quarter was its Web-based lending business, where new loans climbed 70% to $1 billion. The company's stock had taken a hit in May amid concern prompted by rival Lending Club's  (LC) disclosure of irregularities in the sale of a small portion of loans to investors. 

During the third quarter, Square processed 35,000 business loan applications for a total of $208 million. 

"We remain focused on the long-term opportunity of Square Capital and will thoughtfully explore new growth channels," the company said. 

The payment technology firm has reported losses in three of the four quarters since it went public in November of 2015, and executives have said they are more focused on investing in growth than profitability. 

JPMorgan Chase analysts, who have an overweight rating on the stock with a price target of $15, said before the report that Square's premium valuation is justified by its "large and untapped addressable market, unique growth characteristics and an equally unique mission and corporate culture." 

In September, the company announced improvements to its chip-card reader that shaved 25% off the time required for processing payments; they now take just 4.2 seconds. Square also expanded its software to include services requested by customers, such as invoices and instant deposits, and teamed with Rhode Island-based Upserve to provide loans to the restaurant-management firm's customers. The company's new product, Instant Deposit, has been used by 200,000 sellers who made 4 million transactions, and Caviar, its food delivery service, is expanding.

"We continue to feel great about the momentum we see in Capital and Caviar and then newer products like Instant Deposit," Square CFO Sarah Friar said on the company's earnings call. "That's what's causing the top-line beats."

While Square boosted its full-year revenue forecast 1.8% to $1.7 billion, "we don't want to get ahead of ourselves," Friar said. "Which is why you see us always try to be very kind of prudent with how we think about guidance."

More from Investing

Global Stocks Rally as US-China Trade War Thaws; Dow Could Test 25,000

Global Stocks Rally as US-China Trade War Thaws; Dow Could Test 25,000

The Stock Market Has Every Reason to See a Fresh Rally

The Stock Market Has Every Reason to See a Fresh Rally

3 Simple Tips on Investing From TheStreet's Jim Cramer

3 Simple Tips on Investing From TheStreet's Jim Cramer

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

After PayPal Buys iZettle, Pay-Tech Firms Could Process These Deals

After PayPal Buys iZettle, Pay-Tech Firms Could Process These Deals