Square Earnings: What to Look for

Key Takeaways

• Analysts estimate adjusted EPS of $0.13 vs. $0.12 from Q1 2019.
• Gross payments volume is expected to grow by 15.7% YOY.
• COVID-19 is expected to cause drastic slowdown in Square's revenue growth as many of its small business customers are hurt by pandemic.

Square Inc. (SQ), the financial services company co-founded by Twitter Inc. (TWTR) CEO Jack Dorsey, has delivered impressive growth in both earnings and revenue since going public in 2015. But COVID-19 has changed that. The pandemic has significantly curtailed financial transactions by consumers and businesses, pushing Square's stock down by as much as 55% earlier this year. Since then, it's recouped only part of its losses. Investors will focus heavily on how much COVID-19 has hurt Square and its business customers when the company reports earnings for Q1 FY 2020 after the market close on May 6. For the quarter, analysts expect Square to report a drastic slowdown in adjusted earnings per share (EPS) growth as revenue growth decelerates.

Investors also will look closely at another key Square metric, gross payments volume (GPV), as a gauge of performance. GPV measures the total volume of payments the company processes. While analysts expect solid GPV growth, it nonetheless will be at the slowest pace in at least 3 years.

In the past 12 months, Square's stock has underperformed the S&P 500 by a significant margin, providing a total return of -9.6% compared with -3.2% for the broader market.

For Q1 periods during the past several years, Square has posted dramatic growth in adjusted EPS both annually and quarterly. That growth, nonetheless, often has varied widely on a quarterly basis, which often happens with fast-growth companies. Adjusted EPS rose 199.4% YOY in Q1 FY 2017, by 26.3% in Q1 FY 2018 and by 93.2% in Q1 FY 2019. But for Q1 FY 2020, analysts expect adjusted EPS to rise only 8.5% to $0.13, which would be the slowest YOY quarterly growth rate in nearly 4 years.

Square's revenue growth appears to be holding up better than earnings. In the prior eight quarters, revenue has increased by between 40.9% and 51.4% YOY. For Q1 FY 2020, analysts expect revenue to rise at a slower, but still strong, 34.7% YOY to $1.3 billion.

Square's performance may worsen as the year goes on because the pandemic did not have a big impact on most businesses until late in the calendar first quarter. Square analysts for example, currently estimate full-year 2020 revenue growth will slow to 7.3% as adjusted EPS plunges by 28.5%. 

Source: Visible Alpha

As indicated, many investors will look at Square's gross payments volume, which is a key measure of Square's success in an increasingly crowded payments industry. This figure has grown significantly on an annual basis every quarter for the past three years. If analyst expectations come to pass, Square's gross payments volume for Q1 FY 2020 will be roughly twice the same figure in Q1 FY 2017, reflecting the company's rapid growth. During that period, Square established itself as a leader in payments and financial services, with its popular Cash App as a flagship mobile payments offering. Square has maintained its growth rate in the face of competition from large rivals like PayPal Holdings Inc. (PYPL) and credit card providers like Mastercard Inc. (MA). But the industry now is especially vulnerable to the COVID-19 pandemic, which has impacted small business clients particularly heavily. Investors should look to gross payments volume to determine whether Square has been able to sustain its growth in this area into 2020.

Analysts predict that Square's gross payments volume will climb by 15.7% YOY to $26.1 billion in Q1 FY 2020. While this growth is strong, it also represents a slowdown from prior quarters. The 15.7% growth estimate is half the growth rate of the same quarter three years ago. Square's YOY growth in Q1 gross payments volume already has been moderately decelerating for the past three years. It has slowed from 32.6% growth in Q1 FY 2017 to 30.6% in Q1 FY 2018, then to 26.7% in Q1 FY 2019. While there's no consensus estimate for gross payments volume in 2020, it may slow even more. One sign is analysts' bearish consensus estimates for Square's revenue growth in 2020, which is expected to slow sharply.

Article Sources

1. Visible Alpha

2. TradingView. "Financial Data," Accessed May 4, 2020.

3. Wall Street Journal. "Square Keeps Rolling Along," Accessed May 4, 2020.

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