Square Inc. (SQ, Financial) announced second-quarter earnings after the closing bell on Wednesday, Aug. 1. The technology company beat estimates for both revenue and earnings, helping to fuel further confidence in the stock’s value.
Revenue
Adjusted revenue was $385 million, an increase of 60% from the comparable quarter. Revenue beat analysts’ estimates by $17.41 million.
Source: Square
Subscription and service-based revenue posted the strongest growth, gaining 127% to $134.3 million. Management’s comments in the second-quarter earnings call highlighted Instant Deposit, Caviar, Cash Card and Square Capital as key drivers of growth in the category. Revenue growth for the company has been steady over the past three years, averaging 37.58% with a one-year growth rate of 29.59%. CEO Jack Dorsey commented on one of Square’s newest offerings, Square for Restaurants, which provides payment processing and can also be integrated with Caviar, which helps restaurants provide delivery and pick-up services. Square for Restaurants is expected to be a considerable revenue generator in the near term.
Earnings
Adjusted net income for the quarter was $62.4 million, increasing 109% from the comparable quarter. Earnings per share were reported at 13 cents, increasing 6 cents from the comparable quarter and beating analysts’ estimates by 1 cent.
With the adjusted results, the company’s net margin was 16%, increasing from 12% in the comparable quarter. For the first half of the year, the net margin also increased, reported at 13% compared to 11% in 2017.
The bottom line was affected by acquisitions of Zesty and Weebly. Management also reported that capital expenditure investments through 2018 would focus on three areas: omnichannel solutions, which will integrate Weebly, financial services and international.
Value
In trading following the earnings announcement, Square is up 8% to $72. Year to date, the stock has a gain of 93%. Its one-year return is now 150%. Since its initial public offering on Nov. 19, 2015, the stock has gained 587%.
In the second quarter, management increased their outlook for revenue but kept earnings before interest, taxes, depreciation and amortization guidance unchanged. The total revenue expectation increased to $3.19 billion to $3.22 billion, while the adjusted revenue estimate increased to $1.52 billion to $1.54 billion. The midpoint of these levels represents a 55% annual growth rate for the year in comparison to a 49% growth rate in 2017. The expected EBITDA of $240 million to $250 million would represent a 76% increase from 2017 at the midpoint.
Analysts see the stock as slightly overpriced according to Yahoo Finance, which has a one-year target price of $65. Over the five-year term, it is likely that revenue growth could slow, but earnings per share growth could increase as capital investments realize greater returns.
With an 85% earnings per share growth rate over the next five years and a weighted average cost of capital of 11%, the stock has an estimated discounted cash flow value of $80. The DCF also signifies that the substantial returns may be reaching their peak for investors in the near term, but the company continues to make large-scale capital investments as an innovator in the industry that add significant incremental value over the long term.
Disclosure: I own shares of Square.
