Key Takeaways

  • Adjusted EPS was $0.34 vs. the $0.16 analysts expected.
  • Revenue exceeded consensus estimates by nearly $1 billion.
  • Gross payment volume came in above analyst expectations as well.

What Happened

Square reported Q3 2020 earnings on November 5. The company shattered analyst expectations on revenue and adjusted EPS. Total net revenue of $3.03 billion was up 140% YOY, compared to predicted YOY growth of 66.2%. Adjusted EPS of $0.34 was more than double analyst predictions, representing YOY growth of 36% against an anticipated decline. Square also reported higher-than-expected gross payment volume (GPV) for the quarter, as the company processed $31.7 billion in Q3. This represents a YOY increase of 12%, while analysts had predicted growth of 5%. 

Q3 also marked a highly successful period for Square's Cash App digital wallet, which posted 212% YOY gross profit growth. The company cautioned that, while the broader economic environment remains uncertain, it believes that Cash App, Seller, and other features are well-positioned for shifts in contactless payments, digital wallets, and omnichannel commerce going forward.

(Below is Investopedia's original earnings preview, published November 2, 2020)

What to Look For

Square Inc. (SQ) has seen its business dramatically affected by the pandemic-induced economic downturn, with gross payment volume declining. However, investors are growing increasingly optimistic about the future of the financial services company co-founded by Twitter Inc. (TWTR) CEO Jack Dorsey. The stock has posted strong gains in recent months as the company showed a surge in gross profit from its Cash App digital wallet, and amid signs of recovery in key businesses in its most recent reported quarter.

Investors will look to see whether Square can show further progress when it reports earnings after market close on November 5, 2020 for Q3 FY 2020. Analysts expect a mixed quarter, with a sharp year-over-year (YOY) increase in revenue and its second straight quarter of declining adjusted earnings per share (EPS).

Investors also are likely to watch the key metric of gross payment volume (GPV), a reflection of overall transaction volumes. GPV is Square's main gauge of the total dollar amount being transacted through its payment ecosystems. Analysts expect GPV to rebound in Q3 after a decline in Q2 FY 2020.

In spite of COVID-related setbacks, Square's stock has skyrocketed in the past two quarters, easily recovering from losses at the outset of the pandemic. Over the past 12 months, the company's shares have provided investors with a total return of 149.2% compared to the S&P 500's total return of 7.3%. This performance data is as of October 31. All other data is as of October 28.

One Year Total Return for S&P 500 and Square
Source: TradingView.

Square's stock has risen dramatically in spite of weak earnings results. After falling with the broader market in March, Square's shares advanced this year even after announcing a loss on May 6 and plunging earnings on August 4. The stock traded sideways in a wide band from early August to mid-September, then began a sustained advance before pulling back slightly in mid-October.

The company posted its first quarterly loss in at least three years in Q1 FY 2020, amounting to $0.02 per share. That was followed by a 12.2% plunge in adjusted EPS in Q2 FY 2020, its first YOY decline in at least three years. These two quarters ended a stretch of at least 14 quarters in which the company posted consecutive quarterly adjusted EPS gains YOY of between 42.4% and 509.1%. Analysts estimate adjusted EPS to plunge 34.4% YOY in Q3 FY 2020, which would be nearly triple the decline of Q2.

By contrast, Square's revenue growth has accelerated in recent quarters. Revenue grew 63.8% in Q2 FY 2020 YOY, the largest increase in at least 14 quarters. Analysts expect that Q3 FY 2020 will see an even larger gain of 66.2% YOY. By comparison, Q3 FY 2019 saw YOY growth of 43.6%.

Square Key Metrics
  Estimate for Q3 FY 2020 Actual for Q3 FY 2019 Actual for Q3 FY 2018
Revenue ($B) 2.1 1.3 0.9
Adjusted Earnings Per Share ($) 0.16 0.25 0.14
Gross Payments Volume ($B) 29.6 28.2 22.5

As indicated, many investors will look closely at Square's gross payment volume, or GPV, which measures the total dollar amount of transactions processed by sellers using Square as well as certain peer-to-peer payments via the Cash App. GPV is a key measure of the company's success in an increasingly crowded payments industry, which includes rivals like PayPal Holdings Inc. (PYPL) and credit card providers like Mastercard Inc. (MA). In addition to a measure of Square's ability to charge fees for the transactions it processes, GPV is an indicator of the company's ability to market its non-payment business services to a wider customer base. These services include inventory management platform Stitch Labs and web hosting service Weebly, among others.

In Q2 FY 2020, Square's GPV saw its first YOY decline since the company went public, falling 14.9% YOY because of transaction slowdowns related to the pandemic. However, the company's GPV had already slowed its pace of growth before this turnaround. In Q1 FY 2020, GPV grew by 14.0% YOY, the slowest growth rate since late 2017. Analysts now expect the company to post a 5.0% YOY increase to GPV for Q3 FY 2020. While this marks a recovery from the most recent quarter, it would nonetheless reflect a much slower pace of growth than investors have come to expect from Square. If the global economy and consumers continue to suffer due to the pandemic, Square's gross payment volumes will struggle to return to their earlier rapid pace of growth.