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Why Square Stock Sank 23% in August

What happened

Shares of Square (NYSE: SQ) fell more than 20% last month, according to data provided by S&P Global Market Intelligence, following the release of the digital payments company's second-quarter results.

So what

Square's second-quarter sales and profits actually came in above Wall Street's estimates. The company's adjusted revenue climbed 46% year over year to $563 million, while its adjusted earnings per share surged 62% to $0.21. Analysts had expected revenue and adjusted EPS of $557 million and $0.17, respectively.

However, investors appear to be focusing more on Square's guidance. For the third quarter, the company expects to deliver adjusted revenue of $590 million to $600 million and adjusted EPS of $0.18 and $0.20. The midpoints of these ranges are less than the $599 million in revenue and $0.22 in adjusted EPS analysts had forecast.

A person pointing to a declining stock price chart.

Square's underwhelming guidance led some investors to sell its stock. Image source: Getty Images.

Now what

Investors may be overreacting to Square's slightly lower-than-expected guidance. The company still has tremendous potential for long-term growth. Square's core payment processing business represents just a small fraction of the massive global digital payments market. Its business financing arm, Square Capital, also has the potential to grow exponentially. And Square's Cash App continues to expand its user and revenue base at an impressive clip.

With so much growth still ahead -- and with its share price now down about 40% from its 52-week high -- investors may want to consider picking up some Square stock today.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short September 2019 $70 puts on Square. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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