Square share price: could Q2 earnings incite an upside breakout?

Payments processing upstart Square [SQ] has been keeping investors very happy of late. As of 25 July and just days before reporting its Q2 earnings, Square’s share price is up nearly 50% year-to-date at $80.02, and 8.6% from its last earnings report on 1 May. The US business has managed to rebound from a rough patch this May, in response to lower-than-expected payment volumes on the platform.

Still, Square’s share price remains 21% off its all-time high of 101.15. So, if the business announces positive results on 1 August, will this lead to a breakout for the stock?

What we know so far 

Square’s Q1 results underscored some of the challenges the company is facing. On the one hand, it saw adjusted revenues rise 59% to $489m, and outperformed analyst estimates with adjusted earnings per share of $0.11. 

On the other hand, figures ultimately showed signs of an ongoing slowdown. At Square’s previous Q4 2018 results, the company posted revenues of $464m, representing a 64% quarter-on-quarter rise. However, the company’s guidance for Q2 suggests a contraction in growth is on the cards; if Square hit their estimated adjusted revenue of $545-$555 million, that will represent growth of just 43%, a significant regression and a further indication of a continuing decline. 

Square also posted a net loss of $38m for Q1, up from $28m in the previous quarter and $24m before that. Square’s guidance suggests this gap will widen even further in Q2. 

Will Square beat expectations?

Wall Street analysts are optimistic Square will report an earnings beat. The consensus forecast is calling for $557m in revenue, up about 45% on a year-over-year basis.

Meanwhile, earnings per share are expected to come in at $0.16, compared to $0.13 during the same period last year. 

Writing on InvestorPlace, Will Healy says if investors want more clarity on the stock’s direction they should pay particular attention to Square’s forward guidance for the remainder of the year, when it reports later this week.

Square share price vitals, Yahoo Finance, 29 July 2019

What’s driving optimism?

Square has had a year full of new launches, adding 32 new elements to its payments ecosystem in the past seven months, according to Citi analyst Peter Christiansen. 

There is particular optimism around the Square Card – Square’s debit card for merchants – which analysts such as KeyBanc’s Josh Beck believe could rake in $100m in annual revenue for the company. Raymond James analyst John Davis argues that the card could arrive as soon as next year, which would help a company suffering increasing cash burn.

Is Square a “buy”?

Technical analysts argue that Square is poised to make an upside move. Real Money’s Bruce Kamich says that despite a price dip in May, Square has rallied back in June and so far in July to retest an early March peak. 

The stock is currently well above a rising 50-day moving average, and the declining 200-day line. Meanwhile, the on-balance volume (OBV) line moved up to a new high in July and could be foreshadowing a new all-time high in the share price. 

At a price of $80.02 (as of 25 July’s close), Kamich predicts traders could go long on Square, “risking a close below $74 but with an upside price target of around $95.”

CMC Markets analyst, David Madden, says: “The stock has been broadly pushing higher since December 2018, and a break above the $82.77 mark might bring $90.00 into play. Support might be found at $71.20.”

“The stock has been broadly pushing higher since December 2018, and a break above the $82 77 mark might bring $90.00 into play. Support might be found at $71.20” - CMC Markets analyst, David Madden

Meanwhile, InvestorPlace’s Healy says that Square is at an inflection point. The company has reached the approximate price point from which it pulled back in February, which means if it sustains itself at this rate it could run higher in the near-term – even retesting levels of above $100 per share. 

What about a pullback?

A pullback, however, could see the stock retest its mid-$70s support level, according to Healy. And his colleague, Tom Taulli, suggests a whole host of issues could contribute to that pullback. Taulli argues that while the company deserves a premium valuation, its forward price-to-earnings ratio of 73 appears steep. 

In addition, Taulli says that sell-side analysts have been cautious on the stock, which currently has three “sell” ratings and 17 “holds”. The average target price also assumes zero upside from its current levels. 

Square stock is already pricing in much of the good news, he says. “This could make the upcoming earnings report a bit dicey, since the growth rate has already been trending down during the past few quarters.”