Square rallies on hopes of Senate bill keeping small businesses afloat

• Square rallied Wednesday after the White House and Senate leaders agreed on terms for a bill that could allow nonbank lenders to participate in emergency lending to small businesses.
• The payments company is heavily indexed to restaurants, bars and coffee shops, which are getting crushed while Americans stay inside to avoid spreading the coronavirus.
• The company also cut first-quarter guidance and withdrew its full-year guidance due to uncertainty. But Square outlined growth in January and February, showing the drag from COVID-19 will likely be "a mere bump in the road," according to Macquarie analyst Dan Dolev.

Twitter and Square CEO Jack Dorsey speaks during a press event at CES 2019 on January 9, 2019 in Las Vegas, Nevada.

David Becker | Getty Images News | Getty Images

Shares of Square surged 13% Wednesday after the White House and Senate leaders reached a deal on a bill that would help keep small businesses afloat and would allow some nonbank lenders to participate in the emergency loan program. 

The $2 trillion bill — said to be the largest rescue package in history — includes small business loans to ease the economic impact of the coronavirus slowdown. The Senate is expected to vote on the bill as early as Wednesday evening. The House has not yet voted on it.

Square has become a popular lending option for businesses such as coffee shops and restaurants, many of which are closed due to "shelter in place" measures in major cities.

As part of the terms agreed to on Wednesday, "additional lenders" can be approved through the Secretary of the Treasury if they have the "necessary qualifications to process, close, disburse and service loans made with the guarantee of the administration."

Square and other fintech companies had been lobbying to be included in the bill and touted their speed and automated underwriting as a reason for inclusion. Financial Innovation Now — an industry group representing Square, PayPal, Intuit, Stripe and other nonbank finance companies — sent a letter to Congress on Friday asking that their members be included in any emergency U.S. government funding. 

When asked about it on a call with investors Tuesday evening, CEO Jack Dorsey said Square would be "happy to help" and "was definitely open to working with the government" on distributing loans. The "speed aspect is critical," said Dorsey, who is also the CEO of Twitter. 

"The benefit we would add to disbursement is really around speed," Dorsey said. "Square Capital can get a loan to a business in under 24 hours."

Coronavirus a 'bump in the road'

Square held an investor day Tuesday evening that outlined a near-term slowdown from the coronavirus shutdown. The company cut first-quarter guidance and withdrew its full-year guidance due to "uncertainty" around the virus. Square now expects total net revenue of $1.3 billion to $1.34 billion, versus the $1.34 billion to $1.36 billion range originally forecast. 

The slowdown is already hitting Square's first-quarter profitability, according to CFO Amrita Ahuja. Over the past 10 days, gross payment volume was 25% lower than it was this time last year. Payment volumes are down 45% year over year in metro areas such as New York, San Francisco and Seattle, according to the company.

But the drag from COVID-19 will likely be "a mere bump in the road," according to Dan Dolev, Macquarie senior payments analyst. 

"We see SQ emerging stronger post crisis, accelerated share gains by adapting to change faster than many competitors, and building a more balanced business and customer mix," Dolev said in a note to clients Wednesday. He also said the government stimulus to individuals and relief for small businesses "can be a near-term benefit."

Despite the March slowdown, Square outlined strong growth in January and February before the outbreak threatened to cripple the U.S. economy. Square saw 51% gross profit growth in those two months. Its Cash app, a competitor to Venmo, grew 118% vs. 104% in the fourth quarter. 

Instanet analyst Bill Carcache upgraded Square to "neutral" from "reduce" on Wednesday. 

"While it's too early to ascertain the failure rate of SQ's large SME customer base, we no longer believe a Reduce rating is appropriate given the 46% decline in shares from their February highs," Carcache said in a note to clients.

Square had planned to invest in a brand awareness campaign. Instead, Square's Ahuja said the company is focusing on helping existing customers navigate the current environment. For example, it expedited the launch of no-contact delivery and curbside pickup and will be debuting a public, web-based directory of Square sellers to promote electronic gift card purchases. 

Even with the help of government stimulus, the economic slowdown from coronavirus is weighing on Square's lending program. Square Capital head Jackie Reses said the company was reining in loan origination growth and tightening lending standards. It's also offering a payment relief for some small business loans, she said. 

Correction: The Senate and White House agreed to terms of a proposed bailout bill on Wednesday, but the bill has not been passed.