There’s been a lot of weakness across the market over the past few weeks, and
Square (NYSE: SQ) has gotten hit harder than the average stock. That’s not a big surprise; Square, after all, is a growth stock trading at a lofty valuation. With
risk-off sentiment permeating the market, those types of stocks tend to get sold.
But this too shall pass. And maybe soon. Square is set to report Q3 earnings tomorrow, and there are a lot of indicators pointing to a beat.
Future Looks Bright for Cash App
In its Q2 earnings release, Square offered a revenue breakdown of its segments for the first time, which showed $1.2 billion in Cash App revenue. The app is growing rapidly, growing from 24 million users in December to 30 million at the end of Q2. Expectations will, of course, be for a nice boost in Cash App users over Q2 levels. I’m not sure whether the Cash App user count will beat expectations tomorrow.
But what I am optimistic about is Cash App user trends over the next few months. I think it’s only a matter of time before another stimulus package is approved, and when that time comes, it should lead to another jump in Cash App volumes.
Why am I confident in that? Because it already happened earlier this year after the first package was passed.
Bitcoin Could Beat Estimates Again… But by a Slimmer Margin
A large portion of that $1.2 billion in Cash App revenue came from none other than Bitcoin. $875 million of it to be exact - a 600% yoy increase. That $875 million blew away consensus estimates of $278 million, and drove Square shares higher post-earnings.
Now, I don’t see the Bitcoin business more than tripling the estimates again – Wall Street won’t be caught so off-guard this time. But with Bitcoin trading near three-year highs, I expect a strong showing.
Gross Payment Volume is Expected to Rebound
Gross payment volume (GPV) dipped 15% yoy to $22.8 billion in Q2, with Square’s high exposure to brick-and-mortar companies the culprit.
Wall Street sees GPV up 5% yoy in Q3, but I think they’re being overly conservative. In Q2, GPV increased as the quarter progressed, and in July, volume was up 5% yoy. Further improvements in August and September would merely be a continuation of an existing trend, and would take the quarterly totals above 5% yoy growth.
I’m expecting a beat here, though I do suspect that the whisper numbers are higher than 5% yoy growth
You Shouldn’t be Concerned About PayPal’s Numbers
On Monday after the bell, PayPal (NASDAQ: PYPL), one of Square’s closest comps, reported its Q3 earnings. Wall Street was disappointed with the results.
But I wouldn’t be concerned, as there was nothing to suggest industry-wide weakness. The disappointment, instead, was for PayPal-related reasons. Here are two of the main ones:
- PayPal’s adjusted EPS outlook for Q4 came in low, at 97-98 cents per share. vs. analyst expectations of $1.07. The lower outlook, however, was simply due to incremental investment being “more heavily weighted to Q4.” It wasn’t related to any weakness in the core business.
- PayPal didn’t issue 2021 guidance – it typically gives next-year guidance on its Q3 earnings call. Investors were spooked, but the lack of guidance doesn’t mean PayPal is in for a tough 2021. The company is just (understandably) expressing uncertainty. If anything, I would expect a strong 2021 for PayPal based on what we saw in 2020.
Square is Expensive… But Worth It
Square shares are trading at 280.1x forward earnings and 9.5x forward sales, a lofty valuation by any measure.
But it’s an industry leader in a rapidly growing industry. The mobile payment market is expected to grow by nearly 20% annually through 2025. There is, of course, risk if you invest in Square. But the potential rewards more than compensate you for that risk.
With shares heavily discounted from where they were a few weeks ago, and key indicators pointing to a solid showing tomorrow, now is a good time to pick up some Square shares.
