A Square Q4 Preview: Investors Underestimating Key Fundamental Drivers

Square Inc SQ's third quarter earnings beat in November helped push the stock higher to its all-time high of $49.56. Since then, the stock has lost its buying momentum and investors will be closely following the company's fourth quarter earnings report Tuesday.

The Analyst

Buckingham Research Group's Chris Brendler maintains a Buy rating on Square's stock with an unchanged $50 price target.

The Thesis

Square is projected by Brendler to report the following:

• Gross revenue guidance: $601.7 million (versus management's guidance of $585 million to $595 million);
• Adjusted EBITDA of $39.3 million (versus management's guidance of $34 million to $37 million); and
• GAAP EPS loss of 3 cents per share and Adjusted EPS of 8 cents per share.

Square's third quarter report unexpectedly showed its transaction costs fell 3 basis points year-over-year, the analyst said. The company is expected to show in Tuesday's report costs remained flat from the third quarter and down 0.5 basis points year-over-year for a Net Transaction Yield of 1.03 percent.

Investors should also pay attention to Square's non-transaction revenue, which continues to be a key theme that the market is "not yet fully aware of," Brendler said. The Subscription & Service-Based revenue is expected to show a 15 percent growth rate in the fourth quarter from a year ago to $50.7 million. This should account for 19 percent of total adjusted net revenue which marks an increase from 17 percent in the third quarter.

Square's status as being a "unique tech disruptor" in the early stages of a global expansion remain unchanged and a beat-and-raise fourth quarter print will "continue into 2019."

Price Action

Shares of Square were trading higher by more than 3.5 percent Monday at $46.47.

Related Links:

Buckingham Calls Square A 'Unique Tech Disruptor'

Morgan Stanley, BofA Positive On Pagseguro, Brazil's 'Square With A Twist'

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