Financial services and mobile payment processor Square (NYSE:SQ) has been flying high in 2020. Just days ago, SQ stock hit $80.90, a six-month high. That represented an impressive 29% gain since the end of 2019.
However, SQ’s winning streak hit a bump in the road on Wednesday. The stock closed at $78.25, down 3.28% on the day. Is this dip the start of a correction? Or is it a buying opportunity in advance of the company’s fourth-quarter earnings report? Its Q4 earnings report is slated to be unveiled after the market closes on Feb. 26.
Looking Back to Last Year’s Q4 Results
It’s worth revisiting the company’s results for Q4 of 2018 to see how it did and how investors reacted to its report.
Square’s results for Q4 of 2018 were strong. The company’s earnings per share beat analysts’ average outlook, coming in at 14 cents, versus the mean estimate of 13 cents. SQ’s revenue, excluding some items, grew 53% year-over-year to $464 million, compared to the average estimate of $454 million. The number of active users of the company’s Cash App — which competes against the likes of Apple’s (NASDAQ:AAPL) Apple Pay Cash and PayPal’s (NASDAQ:PYPL) Venmo — doubled year-over-year.
Based on those numbers, I would have expected SQ stock to react positively. Instead, the shares fell. The reason for the negative reaction was the company’s Q1 guidance and its revenue growth. The company’s top-line growth of 53% sounds great, but it was actually down from 56% during the previous quarter. Slowing growth always concerns investors.
While Square’s revenue guidance was in-line with with analysts’ average expectations, Square projected Q1 EPS of between 6 cents and 8 cents. Analysts, on average, were looking for 11 cents per share.
Blockbuster Holiday E-Commerce Spending
I detailed 2019’s record-setting holiday shopping season in my recent column on Shopify (NASDAQ:SHOP), the Canadian e-commerce company that, like Square, provides merchants with payment processing hardware.
Americans spent $7.4 billion on e-commerce on Black Friday. They topped that on Cyber Monday, spending $9.4 billion. That’s up 19% compared to 2018 and set a new record for the largest e-commerce sales day in U.S. history. Those numbers are relevant to Square as well, as the company offers online payment services for merchants, in addition to its brick-and-mortar payment processing hardware.
Analysts are looking for the strong holiday shopping season to translate into big numbers for Square. On average, they expect its revenue to be in the $1.18 billion range, while their mean EPS estimate is 21 cents — a big jump over last year. However, as last year showed us, big holiday quarter numbers aren’t everything. The market will also likely react to the company’s Q1 guidance as well.
The Bottom Line on SQ Stock
Most analysts aren’t too bullish on Square’s prospects in 2020. In fact, most are betting that Square won’t rise above $80 again this year. However, most of them do feel the stock is strongly positioned and that investors should own it. Among the analysts surveyed by The Wall Street Journal, SQ stock has an average rating of “overweight.” Among those analysts, 18 have a “buy” rating and 16 rate SQ stock a “hold.” Their average 12-month price target is $72.43.
However, there are firms that have a much more bullish stance on SQ. Less than two weeks ago — with SQ trading at the $71 level — Credit Suisse gave the stock an $84 price target.
After SQ reports its results, we’ll know if the company delivered the spectacular holiday quarter that’s been expected. We should also receive guidance from Square that will at least hint at how the company expects to perform in 2020.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
