The fintech disruptor has a good track record for beating analyst estimates. That’s great news for owners of SQ stock.
The question now is not whether Square will report good earnings, but if it will deliver analyst-beating results. And if so, by how much. Frankly, at this point, it’s hard to know what could hinder Square stock, up 35% year-to-date.
It’s Hard Not to Like SQ Stock
I’ve liked Square as far back as I can remember. I know I wrote about its stock in February 2017, recommending investors buy it.
“As stocks go, I generally only feel comfortable recommending stocks that make money on a GAAP basis, but I can certainly see the attraction in Square stock, which is something I can’t say for Jack Dorsey’s other horse (TWTR) in the race,” I wrote on Feb. 3, 2017. “I wouldn’t make SQ stock a core holding, but I’d have no problem recommending the stock for a small part of your portfolio because businesses that make or save people money tend to well in the long run; it does both.”
Interestingly, that was before Square came up with the Cash App, which I wholeheartedly endorsed last October. It’s going to take something big to shake me out of my enthusiasm for Jack Dorsey’s baby.
On Jan. 3, I suggested that 2020 could be a breakout year for Square’s stock. Up more than 30% in just seven weeks, it looks like I might have been right. Of course, there are 10 more months to go before the end of the year; I’m not counting my chickens before they’re hatched.
That said, unless it delivers a dud of an earnings report next week, the stock’s momentum looks unstoppable. Here’s why.
Square’s Earnings Record
Heading into its Q3 2019 report in November, analysts were expecting revenues of $1.15 billion and earnings of 20 cents per share. It beat on the top line by 10.4% ($1.27 billion) and by 25% on the bottom (25 cents).
In the past four quarters, starting with Q4 2018 and ending with Q3 2019, Square has delivered positive earnings surprises of 7.7%, 37.5%, 31.2%, and 25.0%. That’s an average of 25.4%.
Analysts, with all the information in the world, can’t seem to get it right with Square. And that’s despite management providing guidance. Eventually, they’re going to get it right, and when they do, Square’s stock price could take a hit.
I would view that eventuality as an excellent buying opportunity. You might want to save a little dry powder for when that day comes.
Heading into next week, analysts expect Q4 2019 revenue and earnings per share of $593.07 million and 21 cents, respectively. That’s year over year growth of 27.7% and 50%.
It’s Still Growing Nicely
Who says it’s not still growing? For all of 2019, Square expects revenue of at least $4.56 billion with Caviar, which it sold in August 2019, and $4.42 billion without the food delivery business. On the bottom line, it should have an adjusted EPS of at least 76 cents. Both of these are higher than its guidance earlier in fiscal 2019.
In the third quarter, Square’s gross payment volume (GPV) was $28.23 billion, 25.5% higher than a year earlier, and 5.4% better than in the second quarter. If it matches its sequential growth from the third quarter in the fourth, it ought to have Q4 2019 GPV of $29.75 billion, 29.3% higher than in the same quarter a year earlier.
If it does deliver $29.75 billion in GPV, it’s an indication that Square’s core transaction business is still accelerating its growth. Larger sellers (defined as more than $125,000 in annualized GPV) contributed 55% of Q3 2019’s total GPV. None of this growth takes into account its Cash App business, which is growing its users at a rapid pace.
About the only thing that might be worth worrying about heading into the fourth-quarter results is whether its operating expenses accelerate at a significantly higher rate than its sales.
That said, it’s unlikely to be something that’s going to stick out in this particular report. Just a word of caution, that’s all.
The Bottom Line on Square Stock
I’ll be shocked if Square lays an egg. Jack Dorsey’s on a bit of a roll in 2020 with Twitter (NYSE:TWTR) stock also up about 19% year to date.
I guess we’ll see the middle of next week. For me, Square remains a big buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.