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Square stock bounces 13% on narrower-than-expected loss

Square shares gained as much as 17 percent on Thursday, building on an after-hours boost from its Wednesday earnings report.

Square reported a narrower-than-expected loss on Wednesday as it got more new sellers, and large sellers processed more payments.

"People want to believe in [co-founder and CEO] Jack Dorsey — people want to believe in Square," Eric Jackson, managing director of SpringOwl Asset Management, told CNBC's "Squawk Alley" on Thursday. "There's no question this was a great quarter, great results. If he can keep doing more of these, more of these on the scoreboard, what's not to like?"

The payment technology company posted a loss of 8 cents per share on revenue of $439 million in the second fiscal quarter. Analysts expected Square to report a shortfall of 11 cents per share on sales of $406 million, according to a Thomson Reuters consensus estimate.

That's compared to a loss of 20 cents per share on total net revenue of $310 million in the year-earlier period. Shares were up nearly 14 percent in extended trading after the report.

Shares of the payment technology company have fallen more than 10 percent this year after it posted a wider-than-expected loss in the first quarter. Following Square's public debut in November, the company has been in the spotlight as co-founder Dorsey juggles duties with his other venture, Twitter.

Jack Dorsey, co-founder and CEO of Square and Twitter.
Louis Ascui | Fairfax | Getty Images
Jack Dorsey, co-founder and CEO of Square and Twitter.

Payment volume, a key metric for Wall Street, increased 42 percent year-over-year to $12.5 billion, driven by new-seller growth, the company said. Larger sellers, that generate more than $125,000 in annualized payment volume, saw payment volume grow 61 percent year-on-year in the quarter, Square said in a shareholder letter.

Stifel analyst Scott Devitt wrote Thursday that investors should be encouraged with the growth in Square's ancillary business, which is "key to long term profitability."

Move toward large sellers

Square credited its intuitive design, cohesiveness with other services, and fast access to capital for the boost from large sellers.

CEO Jack Dorsey said now that the company is at a point where it can scale to large sellers, its looking toward more horizontal services like employee management.

"There's more questions as you get larger, so we've been applying a lot of machine learning and data science," Dorsey said of Square's onboarding services on a conference call with analysts. "We're finding that larger sellers come to us because of our brand. They see us around their neighborhood."

Plus, sellers from early cohorts have now grown to the size where they may need more services, chief financial officer Sarah Friar told investors in the conference call.

"Now that the product has become much more sophisticated, they are able to use it for their entire business," Friar said.

Card readers

Square, which focuses on mobile payment options for small businesses, has been working on faster deposit times and expanding the forms of payment that can be accepted with contactless and chip readers. It's also said to be eyeing a foray into Europe.

The company said ongoing sales of the new contactless and chip readers remains strong, with hardware revenue rising 209 percent year-over-year.

Dorsey noted that though Square has one of the fastest EMV chip readers in the business, as customers get frustrated with slower transaction time, Square has been pushing contactless payments like Apple Pay at events like music festival Coachella. On top of that, it works over Bluetooth, which could help sellers stay ahead of rumors that Apple may eliminate headphone jacks.

"We've been really pleased with the momentum of the contactless and chip reader," Dorsey said. "One thing we've been really impressed with is the scale in the terms of large sellers and small sellers."

Sales from coffee behemoth Starbucks brought $33 million into the company, but that's expected to decline as Starbucks transitions to a new payments processor. Still, the company raised its full-year guidance for adjusted revenue and adjusted earnings before taxes.

"Short term it's a great victory, long-term it's a problem. Square faces massive competition from everywhere." -Vivek Wadhwa, Distinguished professor of engineering at Carnegie Mellon University

Other services and competition

To be sure, the company said it typically sees stronger sequential revenue growth in the second quarter. But Canaccord Genuity analyst Michael Graham said the results continued the strong growth pattern of prior quarters, calling Square Capital a "shining example" validating Square's ability to cross-sell services.

"Fast access to capital is a core differentiator for our product," Friar said.

Outside of Square's core payments business, it also has a small-business loan division and food delivery business, Caviar. Other companies in those two spaces, like LendingClub and SpoonRocket, have faced difficulties, Pacific Crest notes.

"Short term it's a great victory, long-term it's a problem," Vivek Wadhwa, a distinguished professor of engineering at Carnegie Mellon University told CNBC's "Squawk Alley" on Thursday."Square faces massive competition from everywhere ... there are a lot of new technologies that could be developed that could hurt the company in its core products. And then the other businesses it's getting into — also susceptible to major competition."

But Pacific Crest analyst Josh Beck noted the company seemed to be bucking challenging industry trends.

"We haven't been experiencing the challenges our competitors are mentioning," Dorsey said on the call.

"Caviar's growing at a very hefty rate," Friar added.

Square extended $189 million in Square Capital during the quarter, up 123 percent year over year, the company said. Friar said that Square gives sellers access to capital that a bank could not provide profitably.

"Square Capital's competitive advantages continue to attract additional institutional investors, with five new investors added to the program during the second quarter," Square said, citing the data they can provide on businesses day-to-day operations as a boon that eliminates the lengthy loan application process.

Meanwhile, American Express has announced plans to grow small-business lending, while Wells Fargo, Chase, Bank of America and U.S. Bank are catching up on peer-to-peer payment technologies like Square Cash. Still, the threat from American Express may have been overblown, BTIG's Mark Palmer wrote in a research note before the earnings report.

Track shares of Square here.