Shares of mobile payments and financial technology company Square (NYSE: SQ) surged to new highs in the trading days following its third-quarter earnings report last week. Better-than-expected adjusted top- and bottom-line figures, as well as a move to raise full-year guidance, have investors looking up.
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Highlighting the stock's recent bullish run, Square finished the week with a market capitalization slightly higher than that of Twitter (NYSE: TWTR) -- another company Square CEO Jack Dorsey leads. At the time of this writing, the market capitalizations for Twitter and Square are $15.01 billion and $15.2 billion, respectively, according to Reuters data. Square stock is up an impressive 237% in the past 12 months and 59% in the last three months alone.
Here's a look at some of the metrics behind Square's bullish run.
1. Revenue growth is accelerating
As Square carefully pointed out in its third-quarter shareholder letter, its growth is accelerating. Total net revenue and adjusted revenue in Q3 were up 33% and 45% year over year, respectively. In Twitter's second quarter, these same metrics were up 26% and 41% year over year.
Interestingly, a similar trend is occurring at Dorsey's Twitter, albeit in a far less impressive manner. For Twitter, its year-over-year declines in revenue are improving. Twitter's Q3 revenue was down 4% year over year, compared to a 5% year-over-year drop in Q2.
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With both Square and Twitter trading higher after their earnings releases, it's easy to see how investors are quick to applaud improving revenue trends.
2. Square's open platform strategy is paying off
Square has been doubling down on efforts to make its products as open as possible. To do this, Square launched Build with Square -- a set of APIs (application programming interface) for sellers to be able to integrate Square's products, services, and data with other business systems -- last year. This open platform strategy is paying big dividends.
"Sellers and developers have been using our E-Commerce and Point of Sale APIs to integrate Square with their app, website, or point of sale, which has led to Square-connected apps for everything from tea shops to taxis," Square explained in its third-quarter shareholder letter.
Thanks to Square's aggressive open platform strategy, "sellers using business systems that are integrated with Square contributed nearly 20% of third-quarter [gross payment volume (GPV)]," Square said.
3. Subscription and services revenue is soaring
While Square's transaction revenue accounts for the bulk of total revenue, investors shouldn't underestimate the growing importance of Square's subscription and services revenue. Revenue from the segment was $65 million in Square's third quarter, up 84% year over year. This growth easily outperformed Square's 31% and 23% year-over-year increases in its transaction-based revenue and hardware revenue segments, respectively.
Furthermore, thanks to how profitable its subscription and services segment is, it now represents a meaningful portion of Square's gross profit -- at 21%. Square said growth in this important segment was driven by Instant Deposit, Caviar, and Square Capital.
Square drew investors' attention to Instant Deposit and Square Capital, saying.
- "Instant Deposit volume of $2 billion in the third quarter benefited from increased usage by Square sellers and Cash app individuals, both of whom value speed to access their funds."
- "Square Capital facilitated 47,000 business loans totaling $303 million, up 45% year over year."
4. Square is raising the bar
Helping confirm investors' bullish outlook for Square's business, the company increased its full-year outlook. Management said it now expects 2017 adjusted revenue to be between $963 million and $966 million, up from a previous forecast for adjusted revenue between $925 million and $935 million. The midpoint of this guidance range represents a 41% increase in revenue compared to 2016. For Square's fourth quarter, management expects year-over-year revenue growth of 37%.
With Square stock rising so sharply recently, expectations are sky-high. Investors should look for this momentum to continue in Q4 and in 2018.
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