August 5, 2020 01:05 AM RSS

Square Net Earnings and Forecast Disappoint Sends Its Shares Tumbling

  • Wall Street Rebel | Michael London
  • 11/08/2018 1:35 PM
Square Net Earnings and Forecast Disappoint Sends Its Shares Tumbling

Square, Inc. (NYSE:SQ) delivered an extremely strong third-quarter earnings report, Square’s forecast for the final quarter of this year disappointed investors with a lower net earnings estimate per share.

By Michael London

One of the hottest stocks this past two years has been Square (NYSE: SQ) which has risen from $14.62 to $101 a share since the first day of trading in January of 2017. Explosive gains in revenue have fueled the rise in the stock. Yesterday, for example, SQ reported adjusted revenue grew 68 percent year-over-year to $431 million, dramatically beating expectations from analysts polled by Refinitiv (formerly the financial and risk arm of Thomson Reuters), who had forecast $413.9 million.

Despite the beat in revenues, SQ reported 13 cents in adjusted earnings per share, which beat the 11 cents average earnings predicted by analysts covering the company.

Squares third-quarter revenue reached an astounding $882.1 million which amounted to a 51% from the same period last year. Square realized its first quarterly profit - $20 million, compared to a loss of $16 million last year. Square’s CFO Sarah Friar attributed the profit largely to Square’s investment in Eventbrite, which held its IPO in October.

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Still, even though a large portion of the SQ $20 million in profits in the first quarter and the company beating expectations for its third quarter and also raising its adjusted core earnings forecast for 2018 to between $250 million and $255 million, up from $240 million to $250 million,

Regardless of this good news Square’s forecast for the fourth quarter was less than expectations which predicts the company expects adjusted earnings of 12 cents to 13 cents a share, lower than the 15 cents forecast by analysts polled by Refinitiv.

Also of concern is Square’s transaction-based revenue, which grew at only 29% to $655 million during the third quarter, compared to 31% last year. Observers are concerned competitors like Clover are gaining traction. While analysts and investors focus on the 2% decline they are choosing to ignore that Square reported its largest segment of the business which is gross payment volume (GPV) it processes from “large sellers,” who process more than $125,000 a year in GPV, grew by 52%, up from 48 percent a year ago.

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CFO Friars commented during Square’s earnings call the growth in GPV among large sellers has taken place has happened because SQ has made it easier for large retailers to integrate Square’s platform into their businesses. Also, the Square Terminal now allows merchants the ability to make monthly payments on their purchases.

Wall Street Rebel takes the position that this sell-off triggered by this report may be a buying opportunity. If SQ drops to $66 a share, the most recent low investors should consider the above average condition of the economy is going into the holiday season. We believe the company will enjoy a spectacular 2018 holiday season that could allow the company to beat its own 12-13 cents earnings estimate and fulfill analyst’s forecasts of 15 cents in the fourth quarter.

Keep in mind Citibank raised its recommendation on Square a few days ago and said it placed its valuation to as much as $81 at the low end and the high end at $101 a share.

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