Square’s [SQ] share price has soared 26% this year as investors continue to back the payments provider. Giving investors confidence is Square’s growing ecosystem of products and a history of beating Wall Street earnings expectations.
Q4 earnings are shaping up for another beat. But there's no getting away from the fact that Square has never made a profit. And with a sky-high valuation, a share price correction could be due if Square delivers anything other than stellar quarterly earnings results.
When do Square report Q4 earnings?
Why should share price investors care?
For Square's share price to continue its upwards trajectory, traders are betting on it becoming a 'one-stop shop' for businesses. That's where the massive multi-billion dollar valuation comes from.
Square has developed its platform ecosystem to include solutions for payroll, e-commerce, web design and more. Everything a small to medium-sized business needs to operate. Expectations are that revenue from products like Square Invoice and Square Payroll should help drive profits in Q4. After all, being able to upsell your own solutions to an already active audience is a huge advantage.
Analysts really like Square’s Cash app
Square’s Cash app has racked up over 7 million users since going live in 2018. The app lets users easily transfer money to each other and, according to two analysts, has potential to grow.
Number of Square's Cash app users
Macquarie analyst Dan Dolev told Bloomberg News that Cash App fees ‘may be ripe’ for a price hike. Dolev cited a Macquarie survey that showed cash app users could stomach a 50% price increase. If Square pursued this, that would see a 10% increase in 2020/2021 consensus estimates.
Dolev’s $105 target is one of the highest out there for Square. Hitting this would see a 25% upside on the current price. Dolev also has an outperform rating on Square’s stock.
Also upping his share price target for Square stock is KeyBanc Capital analyst Josh Beck. The analyst revised his target from $75 to $90 - a 12% upside on the current level - after a survey of Cash App revealed a market for a range of financial services on the app.
In a note to investors Beck wrote that:
"If Cash App is able to morph from a P2P-focused app to a mainstream financial service encompassing direct deposit, credit card, etc., we believe the utility for the consumer and potential value to Square could both increase significantly."
&ldquo If Cash App is able to morph from a P2P-focused app to a mainstream financial service encompassing direct deposit, credit card, etc., we believe the utility for the consumer and potential value to Square could both increase significantly” - KeyBanc Capital analyst Josh Beck
What to expect in Q4 earnings
Zacks Consensus Estimate expects earnings per share to come in at $0.20, up 42.9% from the same quarter last year. Zacks expects revenues to hit $1.19 billion, up 27.2%.
The big metric to watch is gross payment volume. Zacks has this pegged at $28.5 billion, up 24.5% from the same quarter last year.
Square has managed to beat expectations four quarters in a row. Last quarter, Square delivered earnings per share of $0.25 when Wall Street expected $0.20. For this quarter, Zacks has an earnings expected surprise prediction (ESP) of 3.59%. So while a beat may be in store, it might not be as crushing as previous quarters.
|Operating Margin (TTM)||0.25%|
|Quarterly Revenue Growth (YoY)||43.60%|
Square share price vitals, Yahoo Finance, 25 February 2020
Time to buy Square?
Square's share price trades at a toppy 83x forward price to earnings ratio, making it one of the more expensive tech stocks out there. Another concern is that Square's share price gains could be about to run out of steam. An RSI of 69 is just shy of overbought territory - any higher could indicate a correction is due.
Perhaps with this in mind, analysts tracking the stock on Yahoo Finance have a $76.22 average price target. Hitting this would represent a 5% downside on the current share price.
For Square to justify its toppy valuation, it will have to deliver a strong set of quarterly numbers.