Square's (SQ) - Get ReportrecentQ1 2020 results surprised investors by missingits EPS estimates, although its shares still rallied. Indeed, Square's stock has been very volatile, as have most stocks of late, and although Square missed bottom-line estimates due to having to take reserves for transaction and loan losses, these are one-off and there's more here than meets the eye.

Square's smaller peer-to-peer payment service, Cash App, makes up 33% of total gross profits, but it's growing very quickly at triple digit revenue growth ratesand shows no signs of slowing down.

Square is priced at 7.4 times trailing sales, but its revenues continue to grow rapidly year-over-year by 44%.

Square reports that before the impact of COVID-19, the company was growing its gross profits 51% year-over-year, excluding its divested Caviar business. Gross profits are Square's preferred key performance indicator rather than revenues, sinceits cost of revenues includesprocessing fees and bank settlement fees paid to third-party payment processors, which are largely out of its control.

Performance before the impact of shelter-in-placehas been a theme among most reporting companies this quarter. Square notes that Q1 was performing strongly, but that in the second half of March, its results severely contracted.

Further, similar to most companies, despite Square stating that it expects a "material impact" to its upcoming results, investors are willing to look past that on the expectation that once the economy reopens, companies will be performing strongly once again.

It has long been understood that although Square derives 66% of its total gross profits from its Seller ecosystem, making it by far Squares biggest segment, this segment'srevenue growth rate is rapidly decelerating.

Specifically, despite Squares strong performance in the first two months of Q1 2020, the final two weeks of Q1 dragged down its Seller ecosystem segments performance so that it ended the quarter growing its revenues at 18% year-over-year.

Looking back to 2018, Squares Seller ecosystem was growing its revenue growth rates at 38%, then in 2019 it was growing its revenue growth rates at 30%. And Square exited Q4 2019 growing at 27%. Hence, even without the impact of COVID and shelter-in-place, the trend on Squares Seller ecosystem was already slowing down. Why?

This spaces economics are simply too attractive and face intense competition from numerous players, such as PayPal (PYPL) - Get Report, Shopify (SHOP) - Get Reportand Stripe. What's more, the latter weeks of March and in early April were particularly challenging for Squares Seller ecosystem, as it mostly relies on person-to-person card contact.

However, starting in the second half of April, this business unit started to stabilize as many businesses adapted their operations. Indeed, Squares Gross Payment Volume bounced back slightly compared with the start of April, driven by new sellers adapting to contactless commerce, thetiming of the Easter holiday and government stimulus programs.

If Squares story ended there, the allure of this stock would be wrongly placed. But although Squares Cash App segment only accounts for approximately a third of Squares total gross profits, this segment continues to grow its revenues at a breakneck pace.

This latest quarter saw Squares Cash App gross profits grow by 115% year-over-year. The readers' first question will be, was this a one-off, somehow related to COVID? Absolutely not.

Looking back to Q4 2019 this segment was up 147% year-over-year, and for Q3 2019 this segment was up 115% compared with the same period in the prior year.

So why is this segment growing at such a rapid clip? As Squares CEO Jack Dorsey (who is also Twitters (TWTR) - Get Report CEO) states, Square is about making payments quick and painless.

Squares Cash App is also attractive because it has very strong network effects since when a friend or employee adopts Cash App, they ask someone else to join them so that they can send payments to each other.

Accordingly, not only is Cash App seeing increased customers using Cash App to send payments, including celebrities sending funds to help support their fans and followers during this troublesome period, but its increased array of products are resonating with its existing customers, which is increasing the lifetime value of each customer, driving an increase in profitability.

On the surface, Square has is barely profitable. Furthermore, this quarter saw Squares EBITDA fall 85% year-over-year, as Square took reserves for transaction and loan losses. However, investors are seeing past this bumpy period and are willing to give Squares diversified portfolio the benefit of the doubt.

Presently, investors are paying 7.4 times Square's trailing twelve-month sales, which is in line with what investors have been paying during the 2018-2019 period.

Square's portfolio has two main segments. Its larger segment, Seller Ecosystem is still growing its revenue growth rates, but at a decelerating rate.

It also has a smaller segment, Cash App, that accounts for approximately 33% of total gross profits and it's postingtriple digits growth rates and showing no signs of slowing down any time soon.

It's still early days for its Cash App segment, but its performance looks very promising.

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Square Still Represents a Very Attractive Investment - TheStreet