Square Earnings Crush Expectations Yet Again, But What's Next?

Square Inc SQ shares jumped 11% on Friday after the company reported an earnings beat and stronger-than-expected Cash App growth in the third quarter.

Square reported third-quarter adjusted EPS of 8 cents on revenue of $3.03 billion. Both numbers beat consensus analyst estimates of an 8-cent per-share loss and $2.04 billion in revenue. Revenue was up 140% from a year ago.

Gross payment volume from merchant customers was up 9% to 31.7 billion.

Related Link: Here's How Much Investing $1,000 In The 2015 Square IPO Would Be Worth Today

Cash App Path To Profitability: Rosenblatt Securities analyst Sean Horgan said Cash App may be on track for a profitable 2020.

“With shares up 180% YTD, we recognize SQ has had a strong run but we see improving Seller trends and the Cash App continuing on its path to a leading digital wallet, and (possibly) the first to post standalone profitability this year,” Horgan wrote in a note.

Needham analyst Myank Tandon said Cash App, improving Seller dynamics and reserve releases drove the big earnings beat.

“While the company is continuing to withhold guidance, we remain positive on the shares for aggressive growth investors looking for exposure to the positive trends driving growth in digital payments,” Tandon wrote.

KeyBanc analyst Josh Beck said even after stimulus programs ended, Cash App gross profit levels remained above first-quarter levels.

“Cash App once again delivered strong revenue and gross profit growth, seeing nearly doubled growth in daily transacting actives y/y and encouraging multi-product adoption (e.g., stock brokerage), which can act as a gross profit multiplier,” Beck wrote.

Risks Ahead: Morgan Stanley analyst James Faucette said Square is putting up some impressive growth numbers, but investors need to understand how vulnerable much of its business is to future regulation.

“We estimate that ~85% of current Cash App revenue is vulnerable to eventual regulatory/legislative changes, but we see that reckoning further in the future than we had previously, affording more time to build a seller/consumer brand,” Faucette wrote.

Bank of America analyst Jason Kupferberg said Cash App “crushes expectations again, but what’s next?”

“We fully expect shares to rally further on this print, but we continue to wonder how much Cash App deceleration the stock can ultimately tolerate,” Kupferberg wrote.

SQ Ratings And Price Targets:

• Rosenblatt has a Buy rating and $210 target.
• Needham has a Buy rating and $230 target.
• Morgan Stanley has an Equal-Weight rating and $44 target.
• KeyBanc has an Overweight rating and $215 target.
• Bank of America has an Underperform rating and $120 target.

Square's stock trade around $196.38 at publication time.