What's In The Cards For Square (SQ) This Earnings Season?

Square (NYSE:SQ), Inc. (SQ) is set to report second-quarter 2016 results on Aug 3. The company is a leading provider of payment processing, point-of-sale (POS), and marketing services worldwide. It completed its initial public offering (IPO) in Nov 2015.

Let’s see how things are shaping up for this announcement.

Factors at Play

Strong Growth: In the first quarter of 2016, Square’s core payments business was strong and witnessed growth. The gross payment volume (GPV) was $10.3 billion, a significant 45% increase on a year-over-year basis.

Contactless Chip Reader: The company’s contactless chip reader continues to gain traction in the market for making payments through the phone. In Apr 2016, in a festival at Coachella, Square’s contactless payments accounted for more than 10% of the card transactions.

Products for Sellers: Square introduced many innovative products for sellers targeted to grow their business.

• Square Capital: Square switched from cash advances to flexible loans as well as introduced the PIN and chip reader in Australia.
• Builder Square: A suite of APIs to let sellers integrate their site with the payment gateway of Square and track all the financial transactions on a single dashboard.

Positive Risk Trend: Square was able to maintain a positive risk trend throughout its entire business segments. It managed to keep the transaction losses related to payment processing as a GPV percentage below its historical average of 0.1%.

Square’s management is upbeat on the second quarter earnings as it has usually been the strongest quarter on a sequential basis. The company expects adjusted revenues to be anywhere between $151 million to $156 million.

Earnings Whispers

Our proven model does not conclusively show that Square will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Most Accurate Estimate stands at a loss of 14 cents, whereas the Zacks Consensus Estimate is pegged at a loss of 11 cents. Hence, the difference is -27.27%.

Zacks Rank: Square has a Zacks Rank #3, which when combined with a negative 27.27% ESP, makes surprise prediction difficult.

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

Stocks to Consider

You could consider the following stock with a positive Earnings ESP and a favorable Zacks Rank:

CDK Global, Inc (NASDAQ:CDK) , with an Earnings ESP of +4.26% and a Zacks Rank #1. The company is slated to report fourth-quarter fiscal 2016 earnings on Aug 3, 2016.

MeetMe, Inc. (NASDAQ:MEET) , with an Earnings ESP of +33.33% and a Zacks Rank #2. The company’s second-quarter 2016 earnings release date is Aug 1, 2016.

Analog Devices, Inc. (NASDAQ:ADI) , with an Earnings ESP of +2.63% and a Zacks Rank #2. The company is set to report third-quarter fiscal 2016 earnings results on Aug 17, 2016.