Will Square (SQ) Surpass Estimates This Earnings Season?

We expect Square, Inc. (NYSE:SQ) to beat earnings expectations when it reports first-quarter 2017 earnings results on May 3.

Last quarter, the company posted a positive earnings surprise of 55.56%. Square boasts a solid earnings track record, having beaten estimates in three of the trailing four quarters. The average earnings surprise over the last four quarters is a positive 23.33%.

Year to date, shares of Square have outperformed the Zacks categorized Internet - Software industry. While the stock recorded growth of 33.9%, the industry gained 11%.

Why a Likely Positive Surprise?

Our proven model shows that Square is likely to beat on earnings because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +12.50%. This is meaningful and a major indicator of a likely earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Square carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 have a significantly higher chance of beating earnings estimates.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The combination of Square’s Zacks Rank #3 and ESP of +12.50% makes us confident of an earnings beat in the upcoming report.

Square, Inc. Price and EPS Surprise

Factors at Play

Strong Growth: In the fourth quarter of 2016, Square’s core payments business was strong and witnessed growth. Gross payment volume (GPV) was $13.7 billion, a significant 34% increase on a year-over-year basis. Net revenue was 452 million, up 21% year over year. We expect this momentum to continue in the first quarter of 2017.

Software and Data: Caviar and Capital continue to drive growth in this segment. Square currently has a healthy group of investors, which is expected to help the company meet growth targets for Capital in the first quarter as well as in 2017. Contributions from instant deposits are also expected to pick up pace. Square continues to innovate with its software and services to enhance their accessibility in both existing and potential markets.

European Venture: The company made its first European venture in Mar 2017 with the launch of its mobile payment services in the U.K. It became the fifth market where Square services are now available after the U.S., Australia, Canada and Japan. We believe this is a sensible move on Square’s part as the market has a considerably high concentration of small and medium-sized businesses and thus offers significant growth opportunities. We expect contributions from this venture in the first quarter.

Q1 Guidance: The company expects adjusted revenues to be anywhere between $192 million and $193 million, and adjusted EBITDA between $14 million and $18 million. This marks an 8% year-over-year margin improvement at the midpoint.

Stocks to Consider

Here are some stocks, which you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

DragonWave (TO:DRWI) with an Earnings ESP of +8.82% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Mettler-Toledo International, Inc. (NYSE:MTD) with an Earnings ESP of +0.33% and a Zacks Rank #2.

The Priceline Group Inc. (NASDAQ:PCLN) with Earnings ESP of +2.06% and a Zacks Rank #3.

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