Square, Inc (NYSE:SQ) has been one of the hottest stocks on the market this year, rising more than 160% through the first 10 months of 2017. Given those stellar returns, it’s natural to expect that SQ stock is destined to lose steam, perhaps in a big way. In fact, SQ has already started to tick down ahead of next week’s third-quarter-earnings report. But that doesn’t necessarily mean it’s time to sell.
If you had the foresight to buy shares of this mobile payments upstart at any point in the last year or so, you’ve made a huge chunk of cash. A big reason why is that Square has beaten earnings estimates by an average of 121% in the last four quarters, despite the fact that the company still is not profitable. Average sales growth of 25% during those four quarters has helped too, but that’s about to change.
Starting with the Wednesday Nov. 8 Q3 report, analysts anticipate sales declines of more than 40% in each of the next two quarters. However, the consensus is that earnings will be in the black, with estimates calling for $0.05 per share in the third quarter and $0.06 per share in the fourth quarter. That’s a pretty mixed bag!
With conflicting top-line and bottom-line estimates, what’s an investor to do with Square stock ahead of next week’s earnings? Nothing.
Buying Opportunity Coming?
If you already own SQ stock, you shouldn’t sell your shares yet in case the company posts another triple-digit earnings beat. If you are considering buying SQ, a miss on earnings or if sales are as low as expected could trigger a big sell-off with the SQ stock price just coming off of all-time highs. And that could spell buying opportunity a few weeks from now.
Granted, I rarely advise trying to play earnings one way or another. There are simply too many unknowns, and the surprises can result in 5% to 10% swings in one direction or another. The upside of those price swings is not worth the gamble of potentially buying a stock that instantly falls double digits.
And in the case of SQ stock, there’s enough to like about the company’s long-term prospects that you can wait to see how Q3 earnings shake out before buying it. It’s a credit card processor for small businesses, with more than half its customers processing less than $125,000 in transactions per year. Its ability to turn any smartphone or tablet into an electronic cash register has revolutionized the payments industry in a way not done since Paypal Holdings Inc (NASDAQ:PYPL), giving smaller companies a cheaper alternative to payment processing.
As those small companies grow, so should Square’s sales. But the faster-growing areas of Square’s business are Square Order, its online food ordering wing, and its new lending arm, Square Capital, both of which are growing sales by more than twice the rate of its payment-processing business. They should also help the company become consistently profitable, as the payment-processing unit only turns a profit of just over 1% on each transaction. Hence, the expectations for positive earnings in Q3 and Q4, and another 79% EPS bump next year.
Overcooked or Not, SQ Stock a Long-Term Buy
Even with another wide earnings beat next week, SQ stock may be due for a short-term correction, but the long-term future of this burgeoning niche company looks bright. That makes SQ worth buying regardless of what happens in the next few weeks.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
