Square's Disappointing Earnings Guidance Is Good for Long-Term Investors

Square's Disappointing Earnings Guidance Is Good for Long-Term Investors

Square's (NYSE: SQ) third-quarter earnings report beat expectations on both the top and bottom lines. Its fourth-quarter revenue outlook was also better than expected, but management's expectations for just $0.05 to $0.06 in adjusted earnings per share (EPS) disappointed investors. The analyst consensus for next quarter is $0.06 per share, and considering Square's run-up in price this year, anything less will be a big disappointment.

But the weaker EPS implies Square is finding new places to invest. At the beginning of the year, CFO Sarah Friar told analysts to expect mid-single-digit adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expansion. The company then proceeded to expand margins much faster.

For the third quarter, Square managed a 7 percentage-point improvement in EBITDA margin over last year. Next quarter's 13% EBITDA margin forecast would be a 3 percentage-point contraction but implies full-year EBITDA margin expansion of about 7 percentage points. That's a number closer to what Friar said investors should expect at the beginning of the year and nothing for investors to sneeze at.

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Source: Fool.com