It’s not often you see a $90 billion company top EPS estimates by 100% in their quarterly earnings report but that’s exactly what
fintech payments provider Square (NYSE: SQ) was able to do last week. Shares had rallied nearly 500% from March through the middle of October, before they cooled off into November. But in hindsight, that 20% dip looks to have been a peach of a buying opportunity as Square knocked their Q3 earnings numbers out of the park last week after Thursday’s session.
Analysts had been expecting GAAP EPS to be in the red to the tune of -$0.08 but after a killer summer, Square posted a GAAP EPS profit of $0.07. A similar upside surprise was seen in their non-GAAP EPS number, which at $0.34 was $0.18 higher than estimates. On top of that, revenue came in almost 500% higher on the year, a truly astounding growth number which makes Square good value for the run their shares put in over the summer.
Fintech Leader
It sets them up as a standout A-player in the fintech space and one that has been able, and will continue, to capitalize on the coronavirus driven surge in e-commerce activity. At the initial onset of the pandemic, this kind of success wasn’t really apparent and savvy investors might have favored the likes of Paypal (NASDAQ: PYPL) as the go-to fintech stock.
This was largely due to Square’s core Seller business being point-of-sale technology that’s used in non-chain brick and mortar businesses like independent coffee shops and the like. Any remaining weakness seen in that segment was more than offset by impressive growth in their Cash app which saw its profits more than triple year on year. For context, Cash App made up close to half of Q3’s total gross profit.
Unsurprisingly, Wall Street was quick to jump on the bandwagon with several sell-side houses coming out strong. Citi upgraded the stock from Neutral to Buy with analyst Peter Christiansen describing Q3 as a “conviction quarter” that proves there’s huge potential ahead for Square. On top of that, as the initial wave of pandemic panic continues to recede and economies continue to re-open, their merchant focused Seller business is continuing to see a rebound which can only be a good thing for the company’s growth goals.
Jeff Cantwell from Guggenheim saw a ton of positives in the company’s other revenue streams too. In a note to clients he spoke about how "adoption of the Square Card, for example, has increased each quarter since it was launched, and in 3Q more than $250M was spent by Sellers using Square Card".
Susquehanna's James Friedman spoke to the company’s 2021 $800 million campaign for their Cash App and Seller products, and told investors to "look for a flurry of product development, sales and marketing across the two ecosystems". In addition to these bullish moves, the likes of Canaccord Genuity, Needham, and Mizuho all upgraded Square shares as well.
Looking Ahead
With the stock now at all time highs, it feels as if Square shares have truly come of age having traded sideways for most of the two years prior to COVID-19. Other names in the payments space like Paypal and Fiserv (NASDAQ: FISV) are seeing fresh bounces into November after a weak close to October which suggests investors are hungry for the long side again.
With Square shares trading above $200 for the first time ever on Friday, it's likely this week will see them continue to set fresh all time highs as Wall Street digests the knockout numbers. For those of us still on the sidelines, Citi’s Peter Christiansen might have said it best when he said “the opportunity is too big to ignore”.
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