Are Expectations for Square Stock Too High Before Earnings?

Square is solid, but it seems like much of the good news is already priced into SQ stock

For Square (NYSE:SQ) stock, last year was a bit of a disappointment. Overall, the return on SQ stock was about 12% — which paled in comparison to many other tech companies, including mature operators like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).

Are Expectations for SQ Stock Too High Before Earnings?
Source: Jonathan Weiss /

Year-to-date, however, things are much different for SQ stock. The return is a tidy 31%, and puts the market capitalization at $35.2 billion. In fact, SQ stock is near a 52-week high.

So, what now? Is the bull case still in force?  Well, on Feb. 26, we should get a much better idea on this. The company will report its fourth quarter results after the market closes.

The consensus for Wall Street is that SQ will report revenues of $593 million, up about 28% on a year-over-year basis. As for the earnings per share (EPS), they are expected to come in at 21 cents. For comparison, revenues and EPS for Square were $464 million and 14 cents, respectively, during the same period a year ago.

For the most part, it seems likely that SQ will meet or exceed expectations. After all, the holiday season was particularly strong for e-commerce.

Just look at Shopify (NYSE:SHOP). This week the company reported its fourth-quarter results and they were standout. Revenues jumped by 47% to $505.2 million and earnings per share came to 43 cents a share. By comparison, Wall Street was looking for $482.05 million on the top line and earnings of 24 cents a share. On the news, SHOP stock rose by nearly 8% to close the day at $531.25.

So, yes, this definitely bodes well for SQ stock.

Regarding the current quarter, the company also had some interesting announcements. Here’s a look:

  • Square agreed to acquire Dessa, a Toronto-based startup (the price tag was not disclosed). The company is focused on developing Machine Learning (ML) applications to help solve business problems like customer engagement, risk management and so on. The company has also made strides in dealing with deepfakes. Although, it looks like a key rationale for the deal was to pick-up top technical talent. Additionally, consider that Toronto has a thriving community for ML and Artificial Intelligence (AI).
  • The company announced the availability of Square for Retail on the Square Register. By doing this, customers will have a much more robust solution, such as with extensive management of the storefront, back office and online presence for all channels.
  • Square also joined with the Wharton School’s Stevens Center for Innovation in Finance to put together a survey of American small business. All in all, the results were quite positive. Not only has there been an increase in overall creditworthiness, but also improved confidence for the U.S. economy.

Bottom Line on SQ Stock

It’s true that Square is an impressive company. It’s even more remarkable that the CEO Jack Dorsey also runs Twitter (NYSE:TWTR). But, then again, he has been able to build strong teams.

However, when it comes to SQ stock, I think investors should be cautious ahead of earnings. Even though the quarter should be a beat, the guidance may be dicey. Let’s face it, Wall Street is already baking in lots of good news — and then some.

Consider that the valuation is at 84 times earnings, which is at a premium to others in the payments industry like PayPal (NASDAQ:PYPL). Wall Street analysts are also more muted in their outlook, as the average price target is at $75.81, which implies 7% downside from current levels.

So, for now, it seems better to wait on SQ stock.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC