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Buy Square (SQ) Stock on Digital Economy Growth?

Benjamin Rains
·4 min read

Square SQ plans to release its third quarter results on Thursday, November 5, as the busy part of Q3 earnings season rolls on. Wall Street just saw results from Apple AAPL and Amazon AMZN, and Microsoft MSFT posted solid beats earlier in the week.

Let’s see what investors should expect from the fintech firm’s Q3 results to help decide if now might be time to buy.

Way Beyond Card Readers...

Square has come a long way from the firm that only sold small smartphone and tablet-connected credit card readers geared toward small businesses and the self-employed.

Today, its portfolio includes a range of point-of-sale offerings, a broader payment infrastructure, including online, as well as debit cards, small business loans, peer to peer payments, bitcoin buying and more. The company’s Cash App competes against PayPal PYPL and JPMorgan Chase JPM.

Many of Square’s clients such as coffee shops, restaurants, bars, and smaller brick-and-mortar businesses, have been negatively impacted by the coronavirus. Still, Square’s Q1 revenue jumped 44% to top estimates. And its second quarter results were even more impressive, as people opted to get their stimulus checks directly deposited in the Cash App.

SQ’s second quarter revenue soared 64%, which marked its strongest growth as a public firm and came despite the fact that gross payment volume dipped 15%. Cash App’s gross profit surged 167% to $281 million. The company said that the app had over 30 million monthly transacting active customers and over 7 million spending on its Cash Card.

Overall, Wall Street was happy to see Square customers using more of its banking features. The company’s longer-term goal is to become the bank of the future. Plus, its seller business saw volumes return to growth in July. And its online gross payment volume jumped 50% to account for 25% of seller volume in the second quarter.

 

 

 

 

 

 

 

 

 

 

 

 

What’s Next?

Square has crushed rival PayPal over the last three years, up over 370%, despite some ups and downs. The stock closed regular trading Thursday at around $170 per share. This puts it about 10% off its mid-October highs, which might make it more enticing to some investors. And even though it has easily crushed both its industry and PYPL over the past several years, SQ trades at a discount to both at 8.3X vs. 9.3X forward 12-month sales.

Zacks estimate calls for Square’s revenues to soar 70% in both Q3 and Q4, both of which would top last quarter’s record growth. Despite its projected top-line expansion, SQ’s adjusted earnings are projected to fall by 44% and 13%, respectively over this stretch.   

Longer-term, the company’s fiscal 2020 revenue is projected to climb by 57% to $7.39 billion, with FY21 projected to climb another 29% higher to $9.53 billion. This would follow up 43% growth in FY19, 49% in FY18 and 30% in FY17.

The company’s adjusted FY20 EPS figure it projected to slip 36% to $0.51 per share, with FY21 projected to soar over 115% higher to $1.11 a share.

Bottom Line

Square grabs a Zacks Rank #2 (Buy) at the moment, based on its longer-term earnings revisions, and it crushed our bottom-line estimates last quarter. But it might be prudent to wait to see how Wall Street reacts to its actual results given the near-term market uncertainties. That said, Square’s outlook appears strong within an economy that’s going more digital every day.

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