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Square Q3 2019 Earnings Preview: Buy Struggling SQ Stock on the Dip?

Benjamin Rains

Square SQ is set to report its quarterly financial results after the closing bell on Wednesday, November 6. The fintech firm has struggled over the last year. Now the question is will earnings be the positive catalyst that Square stock needs?

Square’s Pitch & Problems

Stocks surged Monday and all three major U.S. indexes touched new highs. The positivity came amid reported progress on the U.S.-China trade front, another Fed interest rate cut, solid U.S. jobs data, and better-than-feared quarterly earnings results. Tech giants such as Apple AAPL and Facebook FB recently reported solid top and bottom line figures (also read: A Reassuring Q3 Earnings Picture).

Despite the broader market comeback, with the S&P 500 now up over 21% in 2019 and 8% in the past three months, Square stock has failed to regain any real momentum. In fact, SQ stock has tumbled 22% since the company released its Q2 earnings results on August 1, as investors voiced profitably concerns.

Square and CEO Jack Dorsey—who also runs Twitter TWTR—clearly understood that Wall Street wants to see stronger profits from the decade-old financial tech firm. The firm it announced that same day that it would sell its food-delivery platform Caviar to Uber Eats UBER competitor DoorDash for the $410 million—which was officially completed on November 1.

Meanwhile, the company that helped kick-start the fintech age with its small, smartphone and tablet-connected credit card readers for small and micro-size businesses, has expanded into peer to peer payments, debit cards, business loans, and more. Today’s widely popular Cash App competes directly against PayPal’s PYPL Venmo and other P2P offerings from traditional giants such as JPMorgan Chase JPM. Cash App users can also buy and sell bitcoin.





On top of that, Square’s core payment hardware and backend software offerings have helped it attract larger businesses. For example, sellers with gross payment volumes of $500K or more made up 26% of total Q2 volume, up from 22% in the year-ago period. On top of that, total second quarter revenue surged 44%, while gross payment volume popped 25% to $26.8 billion.

Other Fundamentals

As we touched on already and as investors can see in the chart above, the last 12 months have been rough for SQ stock. Square shares are down 17% in the last 52 weeks, which includes some significant volatility. Square stock closed regular trading Monday at $62.38 per share, down 25% from its 52-week highs of $83.20 per share.

Despite the downturn, Square stock has soared 410% in the last three years to crush PYPL’s 150%, its industry’s 40% average, and backend payment giant Fiserv’s FISV 115%. Therefore, SQ stock would appear to have plenty of room to climb and it sits even further below its September 2018 highs of roughly $99 per share.

Square is still trading at a pretty high forward earnings multiple. But Square only went public in late 2015 and its growth has left few concerned about its valuation. With that said, SQ is currently trading at 4.9X forward 12-month Zacks sales estimates. This marks a discount against its industry’s 5.7X average, as well as its own three-year median of 5.6X and 10.2X high.





Q3 Outlook & Beyond

Moving on, our current Zacks Consensus Estimates call for Square’s Q3 revenue to surge 30.8% from $882.11 million in the year-ago period to reach $1.15 billion, which would come on top of Q3 2018’s 51% top-line expansion. SQ’s fourth quarter 2019 sales are then expected to pop 28% to help lift full-year revenue by roughly 36% to $4.48 billion.

Peeking further down the road, Square’s full-year fiscal 2020 sales are projected to climb 26% above our current year estimate to reach $5.63 billion. These estimates both represent slowdowns against 2018’s 49% expansion. However, the fintech firm’s 2017 sales climbed only 30% and the company is expected to add over  $1.1 billion in sales between 2019 and 2020.

At the bottom end of the income statement, Square’s adjusted Q3 earnings are projected to soar 54% to hit $0.20 per share. Better still, the company’s Q4 EPS figure is expected to skyrocket nearly 79% to help lift FY19 by 64% to $0.77 per share. Then, Square’s full-year 2020 earnings are projected to climb 43% higher than our current-year estimate to $1.10.

Bottom Line

Square has seen its fiscal 2020 earnings estimate climb recently, while its Q3 and Q4 estimates remain unchanged. On top of that, Square has easily topped our quarterly earnings estimates by an average of 24% in the trailing four periods.

Despite these beats, SQ stock fell after its last two quarterly earnings releases. In the end, Square stock still looks like it has plenty of room to grow as part of the larger fintech revolution. SQ is also a Zacks Rank #1 (Strong Buy) stock right now that sports an “A” grade for Growth in our Style Scores system and rests well below its 52-week highs.

Nevertheless, interested investors might want to think about waiting to see how Wall Street reacts to Square’s results and guidance after the closing bell on Wednesday. If Square is able to impress, SQ stock could possibly be headed for a rally.

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