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Can Square’s Q4 Earnings Lift Its Stock Even Further?

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Square stock is up sharply over the last year. The company is set to release its fourth quarter earnings this week. Can the stock continue to rise further after the earnings release?

Fintech stocks have been red hot over the last year. Fintech giant Ant Financial was set to become the biggest IPO of all times before Chinese authorities stalled the listing. Last year, there were successful IPOs from fintech companies like Lemonade and Root Insurance.

This year, fintech company Affirm also listed and the stock soared on the listing day. Social Finance or SoFi is set to merge with Chamath Palihapitiya’s SPAC (special purpose acquisition company) Social Capital Hedosophia Holdings V Corporation (IPOE)

Square’s Q4 earnings estimates

Coming back to Square, analysts expect the company to report revenues of $3.1 billion in the fourth quarter. The company’s revenues are expected to rise 401% in the quarter. Its revenues had increased by over 400% in the third quarter of 2020 also. Its earnings had smashed estimates in the third quarter. Analysts were expecting the company to post revenues of $2.04 billion in the quarter. Excluding bitcoins, Square generated revenues of $1.40 billion in the quarter.

Tesla is also betting on bitcoin

Notably, Square is betting big on bitcoins. Apart from allowing users to trade in bitcoins on its platforms, last year, the company also invested $50 million in the cryptocurrency. Bitcoin adoption received a booster when Tesla announced earlier this year that it has invested $1.5 billion in bitcoins and intends to allow it as a payment mode in the future.

Would Square beat earnings estimates in the fourth quarter?

Analysts expect Square’s adjusted EPS to rise 4.6% year over year to $0.24 in the fourth quarter. The company’s third quarter adjusted earnings per share of 34 cents was almost double of the 16 cents that analysts surveyed by Refinitiv were projecting. The stock had surged after the third quarter earnings release as its revenues as well as earnings smashed analysts’ estimates by a wide margin.

Square provided upbeat guidance

Square was also optimistic on its outlook during the third quarter earnings release. It said, “In October, Seller delivered positive revenue and gross profit growth year over year. Seller GPV was up 8% year over year, which improved modestly compared to year-over-year results in the third quarter.”

Commenting on the Cash App business, the company said that the segment delivered strong year-over-year growth in revenues and gross profit in the month. However, it cautioned that “Gross profit growth in October moderated compared to the third quarter, driven by a decrease in transaction volume per active customer.” According to the company, the trend was due to the end of the fiscal stimulus and extended unemployment benefits.

Cash App benefiting from the exodus from Robinhood

However, Square admitted that “We recognize Cash App growth may not sustain at the same levels during the remainder of the fourth quarter.” Meanwhile, many Robinhood users have been shifting to Square’s Cash App after Robinhood blocked trading in stocks like GameStop.

Can Square beat earnings estimates in the fourth quarter?

Evercore ISI’s Rayna Kumar, who has an outperform rating on Square stock and calls it “most disruptive company in payments and banking” expects the company to beat consensus earnings estimate in the fourth quarter. She sees the company’s 2021 earnings estimates also as too conservative. Her 2021 EBITDA (earnings before interest tax, depreciation, and amortization) estimate for Square is $824 million which is 24% higher than the street consensus estimate.

Brokerages turning bullish

Kumar has a $304 price target for Square stock which is a premium of almost 10% over current prices. Wolfe Research’s Darrin Peller is also bullish on Square stock. He has an outperform rating and a $335 price target on the fintech company. “Square stands out as a material share gainer across its businesses, solidifying its status as a global leader,” said Peller. He expects the stock to “grind higher over the next several months.”

Deutsche Bank also issued a bullish note on Square last week. “Although benefits from the first round of stimulus have started to fade, Cash App should benefit from the second smaller round starting in 1Q21,” said Deutsche Bank analysts as they assigned a $330 price target to the stock.

Wall Street consensus estimates

Meanwhile, the consensus estimate is not too bullish for Square stock. It has an average price target of $175.11 according to MarketBeat which is a 37% discount over current prices.  Of the 45 analysts covering the stock, 24 have a buy rating while 18 have a hold rating. The remaining three analysts rate it as a sell or some equivalent. Meanwhile, Wall Street analysts might take a fresh look at Square stock post its fourth quarter earnings release.

Is Square stock overvalued?

After the sharp rally in Square stock, many analysts are concerned that it is getting overvalued. Square trades at an NTM (next-12 months) enterprise value to sales multiple of 9.6x. In comparison, PayPal trades at an NTM EV-sales multiple of 15.5x based on the data from Koyfin.

Piper Sandler analyst Christopher Donat, who has a neutral rating on Square stock is among those who are concerned about its valuation. “I think Square is a great growth story with a long runway but I’m uncomfortable with the valuation.” He points slowing pace of Cash App downloads to support his argument.

Should you buy Square stock?

Square stock might look overvalued to some. However, growth shares especially in the fintech space are commanding a valuation premium. Looking at the strong growth that Square is reporting, the valuation premium looks justified. For instance, analysts expect Square’s revenues to rise over 40% in 2021 which is almost twice of what PayPal is expected to report.

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Users should remember that all trading carries risks and users should only invest in regulated firms. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.