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Square & Roku Are Good Picks Ahead of Earnings Today

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Square, Inc. (SQ - Free Report) , a provider of payment and point-of-sale solutions, and streaming player Roku (ROKU - Free Report) will release quarterly earnings results on Nov 6, after market close. Let us take a look at how they are poised for this earnings season —

Square saw a solid second quarter, with sales and profits beating Wall Street’s estimates. But, the top-line figure has decelerated. From the year-over-year revenue increase of 68% in the fourth quarter of 2018, the growth rate dropped to 59% in the first quarter of 2019 and then 46% in the second quarter.

Investors, however, shouldn’t be disappointed this time around. Per management’s guidance, this deceleration in adjusted revenues should moderate in the third quarter. The company is expected to report adjusted revenues between $590 million and $600 million for the third quarter. The midpoint of the guidance suggests a year-over-year uptick of 38%.

And historically actual revenue mostly comes in above management’s guidance range. Analysts widely expect Square’s third-quarter adjusted revenues of $1.15 billion, indicating an improvement from the year-ago $882.11 million.

 

Square’s services-based revenues in particular have been seeing outsized growth in recent times. Square’s monthly mobile payment service Cash App user count more than doubled last year and continues to increase this year, per CNBC. Thus, the company’s focus on Cash App should show on third-quarter revenue results.

Cash App generated revenues of $260 million, including bitcoin, and $135 million excluding bitcoin during the second quarter. What’s more, revenues from the broader services-based segment that includes Cash App, Square Capital, Caviar and Instant Deposit surged 87% year over year in the second quarter to $251 million.

For the third quarter, the company’s success will largely be backed by its fundamental business model. After all, its payment solution products are suitable for anyone these days — starting from individuals to small business houses. Reflective of these, analysts now expect the company’s third-quarter earnings per share to increase to 20 cents from 13 cents a year ago.

 

A positive earnings report generally leads to an uptick in the share price. The company’s expected earnings growth rate for the current year is 63.8%, higher than the Internet - Software industry’s projected rally of 7.5%. In fact, the company currently possesses a Growth Score of A and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, shares of Roku have risen a whopping 355.5% so far this year, compared with the broader Broadcast Radio and Television industry’s gain of 11.9%. The streaming TV company’s gains have mostly been driven by strong underlying business growth in recent times, with its last quarterly earnings results beating estimates.

 

The company’s total revenue growth increased 59% year over year in the second quarter of 2019, 52% growth in the first quarter and 45% in the fourth quarter of 2018. Revenues are improving mostly on strength in its platform business, where the company mostly makes money from advertisements. Lest we forget, Roku’s revenues from platform business climbed 86% year over year to $167.7 million, or 67% of total revenues, in the second quarter.

Management believes that a strong platform business will show on third-quarter results as well. And with Apple Inc.’s (AAPL - Free Report) Apple TV+ and The Walt Disney Company’s (DIS - Free Report) Disney+ able to stream on Roku devices, the company’s revenues have certainly received a boost in the third quarter. Analysts, in fact, forecast the company’s total revenues for the third quarter at $258.07 million, implying 48.84% year-over-year growth.

 

But, analysts expect a loss of 28 per share for the third quarter, which is more or less in line with management’s guidance for a net loss between $40 million and $34 million. The guidance takes into account an increase in operation expenses as the company has been aggressively spending on hiring and product development.

 

But these initiatives will eventually help the company perform well in the near future. The company in fact recently said that it expects full-year earnings before interest, taxes, depreciation, and amortization of $30-$40 million, up from an earlier forecast of $10-$20 million.

Roku, currently, boasts a Zacks Rank #1. The company’s expected earnings growth rate for the current year is a staggering 525%, in contrast to the industry’s projected decline of 5.3%.

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