Why Square Stock Dropped 15% in May

MarketsMotley Fool

What happened

After Square (NYSE: SQ) reported first-quarter earnings results last month, its stock price sank 14.9%, according to data provided by S&P Global Market Intelligence.

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The payments processor beat analysts' estimates on the top and bottom line, but gross payment volume of $22.6 billion was below the consensus expectation of $22.8 billion. Square's outlook for the second quarter, which calls for adjusted earnings per share between $0.14 and $0.16, also didn't sit well with investors.

So what

Sometimes high-flying stocks fail to live up to lofty expectations, and that can cause volatility in the stock price -- especially for one like Square that sports a high valuation.

Still, it's difficult to understand how any investor could feel disappointed with Square's performance. Total adjusted revenue was up 39% year over year, as the company continues to see rapid adoption of its ecosystem of services.

One of the highlights was stellar growth in payment volume from the Cash app, up nearly 2.5 times year over year. For that, management credited the power of the app's network effects starting to take over. The Cash app has been the most downloaded peer-to-peer payment app in recent months. The more people who use the app, the more useful it becomes for others to join.

Now what

The company continues to invest heavily in growth, launching new enhancements to its services platform, such as the new Square Online Store and the Square Invoices mobile app.

Based on current business momentum, Square raised full-year revenue guidance to a range of $4.41 billion to $4.47 billion -- up from the previous guidance of $4.35 billion to $4.41 billion. This represents year-over-year growth of 43% at the midpoint of guidance. Adjusted earnings per share are expected in the range of $0.74 to $0.78, representing growth of 62% at the midpoint.

With those impressive numbers, the market might have been too trigger-happy last month.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.