Square stock up 25% on hope Senate bill keeps small business afloat

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

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Shares of Square surged Wednesday after the Senate passed a bill that would help keep small businesses afloat and allows some non-bank 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. 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 bill that passed 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 non-bank 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 ‘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 ten 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 “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 saw 51% gross profit growth in those two months. Cash app, its 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 pick-up 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. 

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