Can Momentum of Square Stock continue?

Square Stock‘s ecosystem is growing

Square was founded in February 2009 by Jack Dorsey, who is also the CEO of Twitter (NYSE: TWTR). This innovative financial services company has expanded rapidly with its unique dongles for mobile phones that enable almost anyone to accept credit card payments.

Square has come a long way since its more humble beginnings. Although SQ started as a payment company, in recent quarters they have introduced a range of software, hardware and apps for small businesses and individual customers. Square’s ecosystem also includes business loans, payroll services, points of sale and omnichannel trading.

For example, SQ’s peer-to-peer mobile payment product, the Cash App, has more than 15 million active customers each month. Square charges companies that accept Cash App payments 2.75% per transaction.

The management wants to see the Cash App become more like a traditional bank whose core customers are small companies as well as private individuals. As the younger generations in particular are making a drastic transition to using electronic payments, Square would like to benefit from that growth.

In fact, SQ has recently applied to become a traditional bank. Becoming a bank can get you started with Square’s long-term growth and eventually increase the SQ share.

In other words, through various growth initiatives, SQ now aims to become a major player in the fintech application area, as well as a small business platform that offers a wide range of services.

When Square acquires a new client, it may be able to sell other services to the client. Therefore, the future of SQ shares is partly dependent on the number of new customers it can reach and partly on the range of services it can offer.

Released on May 1, the latest earnings report and associated shareholder letter provide a good overview of the growth in its service offerings. Square’s business model is evolving as the global payment space develops.

The basis for the SQ share

It is clear that SQ is expanding its services and trading ecosystems across different channels, and many growth investors are bullish on the long-term outlook for Square equities. However, they need to examine how each company that Square now creates will contribute to its results.

While SQ currently has a head start in serving small businesses, Wall Street has some questions about whether it can sustain that growth. If the US economy slows, Square’s growth may begin to slow fairly quickly.

As a company founded in 2009, Square has not yet experienced an economic downturn. In other words, if the US economy stops, investors do not yet know how Square’s management will react. In addition, because most of Square’s customers are small businesses, which tend to be more exposed to financial difficulties, Wall Street does not yet know how SQ shares can react if the economy deteriorates.

In addition, not all areas that Square expands to will necessarily provide easy profits for the company. And unless SQ increases its revenue, Wall Street may not be too forgiving of the high valuation of the SQ stock. Therefore, I would urge long-term investors to be cautious about Square stocks at their current levels.

When it comes to investing, it is not enough to personally like a potential product or service offering; Instead, investors should also look for companies that have catalysts that can increase the value of their shares higher.

But many analysts now express doubts about Square’s expansion into lending and question whether SQ is taking too much risk. Another area of ​​potential concern is the declining growth of its transaction fees, which still generate the majority of its revenue. Square’s shifts towards subscription and service revenues may not compensate for the declining growth of its transaction fees.

Square’s latest earnings report showed that the company’s gross payment volume increased by a relatively modest 27% compared to the same period last year (YoY) to $ 22.6 billion, which made Wall Street worried about the outlook for Square shares. However, Square’s gross revenue increased by 43% compared to the same month to $ 959.36 million.

Still, the SQ share’s quarterly loss was $ 38 million, or 9 cents a share, compared to a loss of $ 24 million, or 6 cents a share a year ago.

In addition, management’s subdued prospects disappointed the market and investors punished SQ shares in the wake of the news.

Finally, the expansion of the Square ecosystem also means that SQ will face increased competition. Square now has to compete with many well-capitalized companies, including the global online payment company PayPal Holdings (NASDAQ: PYPL), transaction processing manager Visa (NYSE: V) and Fiserv (NASDAQ: FISV), which is forming a global payment giant.

Therefore, the owners of SQ shares must decide whether the company has potentially diversified too much away from its core business for payment management.

SQ Stock‘s short-term technical chart paints a mixed picture

Let us briefly remember how the SQ share price has acted over the years.

Following the listing of shares in Square at the end of 2015, the price of the SQ share rose from $ 9 to a full-time level of $ 101.15 in October 2018, as the company became a darling of long-term investors.

The SQ share went through a big tear during the summer of 2018, and lots of euphoria was embedded in the share price. As a result, the Square stock has been weak since it reached its highest level on October 1, 2018. At the end of December 2018, the stock hovered around $ 50.

In 2019, even though the SQ share is up about 30%, April and May have not been good months for the shares. The company’s weak Q2 guidance has triggered recent volatility in the Square share.

In June, however, the stock traded in the stock market rally, rising from a low of $ 59.89 on June 3 to a high of $ 74.55 on June 20.

From a technical perspective, I do not expect Square stocks to make another significant leg anytime soon. In the next few weeks, possibly until its earnings report in early August, the SQ stock is likely to be between $ 65 and $ 75.

SQ has strong support between $ 60 and $ 65. But if there are any negative headlines that affect the technology sector in general or the fintech sector specifically, Square stocks can easily go below $ 60.

I do not expect the SQ stock to reach the $ 100 level in the coming weeks, as the market may begin to value stock growth in the stock more realistically.

The daily volatility of the Square share is high, giving a wide trading range, so short-term traders should proceed with caution. Expect SQ to be choppy at best in the short term.

Square bearings will need to stabilize and build a base again before long-term maintenance can occur. Consequently, investors must be careful to chase the stock at this time.

Strategies for buying SQ shares

The square stock has fallen meaningfully in recent months. In the next few weeks, I would be buying the shares of the payment company around $ 60 or less, especially between $ 55 and $ 60.

Investors who already own Square shares may want to continue the price and maintain their position. With that said, owners of SQ shares who are worried about short-term gains, within the parameters of their portfolio allocation and risk / return profile, may consider placing a stop loss around 3% -5% below the current price point. to protect the profits they have made so far.

Experienced options investors can also consider using a covered call strategy with a six-week time horizon. In that case, for example, they can buy 100 shares in SQ shares around the current price of $ 72 and at the same time sell, for example, an SQ August 16 $ 75 call option.

The $ 75 Strike option offers downward protection against volatility and a decline in the SQ stock. The strategy would also enable investors to participate in a potential price increase on Square shares. This call option stops trading on 16 August and expires on 17 August.

Such a covered conversation would provide breathing space until the markets potentially calm down. Then, after the winning season, investors can choose the best course of action for their portfolios, with less anxiety than those that are not hedged. The owners of a growth portfolio such as Square need to regularly evaluate their opinions based on updated earnings results and developments that affect the company and the economy.

The conclusion of square stock

The current economic and political environment in the United States and globally raises many questions for market participants. And the owners of Square shares may need to reset their growth and share price expectations. If Square’s sales growth slows, the price of SQ shares will also be reduced.

I would consider buying SQ shares if the price drops towards the $ 55- $ 60 level. I believe that the long-term owners of SQ shares will be well rewarded within three or four years when the company increases its ecosystem for small and medium-sized companies and exploits the potential of the Cash App.

At the time of writing, the author had no position in any of the above-mentioned securities.