Now that we are deep into October, third-quarter earnings season is officially in high gear. It's important for investors to watch earnings reports, as they have the power to send stocks higher or lower, as well as shift investor sentiment. Earnings reports provide a three-month snapshot of how a company performed, as well as commentary from management about the future performance and longer-term strategy of that company. If you think a company has performed well in the quarter, it may also be good to purchase more of the stock prior to the release of earnings.
Three Motley Fool contributors are watching the banking and payments fintech Square (SQ -1.97%), the digital marketplace bank LendingClub (LC), and the web developer Wix.com (WIX -0.69%). Here is why these stocks are important to watch this earnings season.
Will Square deliver another blockbuster quarter?
Keith Noonan (Square): Fintech services leader Square has been posting stellar growth, with revenue up 195% year over year across the first half of 2021. While it's unlikely that the company will continue to expand at such a rapid clip, the business's long-term outlook remains intriguing, and it will likely be a very influential player in fintech through the next decade.
The company's Cash App mobile payment application and its payment-processing service for merchants have built impressive user bases, and growing adoption for these platforms and other tailwinds have helped the company post strong performance. The company has also been making some significant acquisitions, most recently announcing plans to purchase Afterpay -- a leader in the fast-growing buy now, pay later category.
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Square is set to publish its third-quarter earnings results after the market closes on Nov. 4, and it's fair to say that expectations are high. Square crushed earnings expectations in the second quarter, delivering an adjusted profit of $0.18 per share when the average analyst estimate had targeted adjusted per-share earnings of $0.05. The company's share price is now up 245% over the last three years.
Some investors and analysts are concerned that slowing growth for Cash App will lead to stock sell-offs or limit potential upside in the near term. However, the company has multiple industry tailwinds at its back, and it could have some big moves in store.
Notably, Bitcoin sales have been boosting the fintech leader's revenue. With the market-leading cryptocurrency enjoying strong momentum at the end of Q3 and recently going on to set new pricing highs, Square could deliver another earnings surprise with its next quarterly release. CEO Jack Dorsey also recently said on Twitter that Square was considering building an open-source Bitcoin mining system, and it's possible investors will get an update on these plans during the fintech company's third-quarter conference call.
With a market capitalization of roughly $118 billion and shares trading at roughly 6.2 times expected sales and 136.5 times expected earnings, Square's Q3 results will be under the microscope, and the company's performance could have a ripple effect on valuations across the fintech space.
A potentially huge catalyst for LendingClub
Bram Berkowitz (LendingClub): The digital marketplace bank LendingClub is up roughly 266% year to date. But with just a $3.4 billion market cap, I believe shares are still way undervalued. It has been a somewhat long ride for the online personal lender, which got wrapped up in a scandal in 2016 and took several years to recover.
At the start of this year, LendingClub closed on its acquisition of the branchless Radius Bank, which helped it streamline its lending operations by giving it a cheap deposit base to use for funding loans and saving on loan origination costs. Radius could also be useful down the road by providing other capabilities such as checking accounts. With Radius intact, management at LendingClub chose to change its model from selling all of its loans to investors to holding as many as a quarter of the loans it originates on its balance sheet, which then brings in monthly, recurring net interest income. The company expects that loans held on the balance sheet will be three times more profitable over their life than those sold to investors.
In the second quarter, the first full quarter with Radius attached, LendingClub generated blowout earnings results. The bank turned a profit several quarters before it was supposed to, generated more than $204 million in revenue, and originated $2.7 billion of loans in the quarter. Management also increased its full-year guidance significantly. The stock rose roughly 50% in the week following the earnings report.
I believe LendingClub's earnings on Oct. 27 could be another watershed moment for the stock. I think if investors see another strong and consistent quarter, they will reward the stock nicely because several of its competitors trade at huge premiums to the company. My one question about the quarter is if the surge of the delta variant in Q3 impacted the overall personal loan market and slowed demand. But if the market was active, I am very confident that LendingClub will generate strong earnings.
Far more than just a basic website builder
Nicholas Rossolillo (Wix.com): Wix has built quite the name for itself over the years as an easy-to-use platform for website development. Early this year, the company said it surpassed the 200 million registered user landmark, and management has stated it thinks half of all new websites could be created using Wix within the next five to seven years. That's quite the ambition.
It's not just the company's no-code platform that is increasing adoption among small business owners, aspiring entrepreneurs, and web developers, though. Wix has an ever-expanding toolkit to help increase the functionality of the modern business's web and mobile app presence. Among these tools are drag-and-drop features that enable things like calendar scheduling, store and restaurant ordering, and shipping and fulfillment options -- tightly integrated with Wix payments, Wix point-of-sale hardware, or use with over 50 other third-party digital payment providers.
Payments, e-commerce, and related services are driving impressive growth for the software firm. During Q2 2021, business solutions sales grew 75% year over year to $80.5 million. It represents only about one-quarter of Wix's total revenue, but at that pace these more advanced web capabilities will grow to encompass a much larger portion of the company's results (since subscription revenue to the basic web builder service grew at just a 24% pace in Q2).
Shares of Wix have been hit hard as of late, in part because of an expected slowdown in overall growth trajectory due to the COVID-19 delta variant as well as lower free cash flow this year while the company spends heavily to support expansion. As a result, the stock trades for just shy of 10 times trailing-12-month sales as of this writing. Nevertheless, Wix's top team said to expect revenue growth of at least 22% in Q3 2021. This is an enduring growth story to watch during the upcoming earnings season, and if Wix continues to deliver on its projections, don't expect shares to remain down and out for too long.
