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Square’s Earnings: What Can Investors Expect in Q3?

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Square (SQ) is set to report its third-quarter earnings results tomorrow. The payment company, run by Twitter’s CEO Jack Dorsey, anticipates its net revenue to grow to $1.13 billion–$1.15 billion in the third quarter. Its adjusted revenue forecast of $590 million–$600 million implies 38.3% YoY (year-over-year) growth at the midpoint.

The company expects its EPS to grow to $0.18–$0.20 in the upcoming quarter, whereas analysts forecast $0.20. The company has beaten EPS estimates in the last four quarters, and we expect it to beat forecasts again in the third quarter. Let’s look at what could drive its performance.

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Cash App

The company’s focus on improving its P2P (peer-to-peer) Cash App could drive its third-quarter revenue. During the second quarter, the company generated Cash App revenue of $260 million including bitcoin and $135 million excluding bitcoin. Higher usage and engagement drove Cash App sales.

Last month, Square offered free stock trading to Cash App users. Additionally, the payment company completed the sale of its food delivery service, Caviar, to DoorDash on November 1. The $410 million deal could enable the company to focus more on Cash App.

CNBC reports Square’s monthly Cash App user count more than doubled between February and December 2018, reaching 15 million. In comparison, PayPal’s (PYPL) Venmo payment app had 40 million users at the end of the first quarter. Cash App also competes with P2P offerings from banks such as JPMorgan Chase.

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Gross payments volumes

GPV (gross payment volume) is another revenue driver. In the second quarter, Square’s GPV grew 25.3% YoY and 18.6% sequentially to $26.78 billion. The company is grappling with decelerating margin and GPV growth. However, we believe its seller investments could drive better payment growth in next year’s second half. The company has developed a strong seller base by attracting new sellers and retaining old ones. Its enhanced product offerings and user experience have also maintained its seller base.

What could dent Square’s earnings

Square’s higher product development investments and expenses could dent its profits in Q3. In the second quarter, Cash App’s marketing expenses surged over 100%, driven by P2P transactions. Currency exchange could also hurt Square’s third-quarter results.

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Analysts favor Square stock pre-earnings release

Many analysts have upgraded Square stock. Recently, UBS initiated coverage of the stock with a “buy” rating. Analysts believe the company is in a transitional phase and could improve in 2021. Hedge fund managers and institutional investors are also bullish on Square stock. CNBC Mad Money host Jim Cramer believes the stock is worth owning.

Of the 39 analysts covering Square, 17 analysts suggest “buy,” 17 suggest “hold,” and five suggest “sell.” Last month, 18 suggested “buy,” 16 suggested “hold,” and four suggested “sell.” Their average 12-month target price of $77.11 for Square implies a 23.6% premium from its November 4 price of $62.38.

Square’s stock returns

Yesterday, Square stock closed 0.35% lower at $62.38, 0.9% and 2.2% above its 20- and 50-day moving averages of $61.81 and $61.05, respectively. However, the stock was 6.7% below its 100-day moving average of $66.84. Square’s market cap was about $26.6 billion yesterday. This year, Square stock has gained just 11.2%.

Square’s 14-day relative strength index score of 52.44 and middle Bollinger Band of $61.81 indicate the stock is neither oversold nor overbought.

Based on its technicals, we think Square stock looks like a “hold.” The stock may not move significantly before or after the company’s earnings release.

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