As CEO Jack Dorsey's mobile-payment firm Square (SQ) prepares to roll out its second-quarter earnings Wednesday, some analysts believe investors could be pleasantly surprised if management holds true to its recently revised earnings guidance.
One reason investors could be undervaluing shares is that concerns surrounding Square's small-business advance services, Square Capital, may be scaring investors away from the company's more traditional mobile-payments processing devices widely seen across small retail outlets, Pacific Crest Securities analysts Josh Beck and Ankit Kapoor said in a Sunday research note.
For one thing, LendingClub's (LC) disastrous first-quarter earnings call in May (which prompted shareholder flight, the resignation of LendingClub's then-CEO Renaud Laplanche, as well as the departure of the company's former partners Goldman Sachs (GS) and Jefferies (JEF) ) could have turned off many to the idea of small-business lending services. (LendingClub announced in May that it participated in a series of dubious loan buybacks, in which the company admitted to changing the dates on roughly $22 million in "near-prime" loans.)
But such fears may be unfounded. Beck and Kapoor said Square Capital does not resemble peers such as LendingClub, OnDeck (ONDK) and Alliance Data Systems (ADS) , especially given the likelihood of better-than-expected sales of mobile processing, suggesting that too much emphasis may be placed on Square's ventures in Square Capital, its small-business lending division, and not its core payments-processing division. For instance, Square's transaction services sales of $1.05 billion made up roughly 83% of the company's total sales in 2015, Square said in its annual filing with the Securities and Exchange Commission.