Payment processing specialist Square Inc (NYSE:SQ) is on the rise yet again today, with SQ stock defying Monday’s flat market with a 2% run. With the move, Square touched new intraday highs at $23.71.
Unfortunately, Square shares look destined for a date with gravity.
SQ stock has been running hot in 2017, up nearly 75% year-to-date thanks in large part to a pair of earnings beats in February and May.
In its Q4 report this winter, Square beat Wall Street with a narrower-than-expected loss of 4 cents per share that also was far thinner than the year-ago period’s 34 cents in red ink. That came thanks in large part to a 30% rise in traditional payment processing, as well as improvements in new products such as Square Capital lending.
That Q4 report also sparked a string of “buy calls” from the likes of Citigroup and Susquehanna.
Square, Inc. followed that up along the way with another positive surprise in May, losing 4 cents compared to 9 cents expected for its 2017 Q1, as well as beats on revenues and gross payment volume. Square Capital was again a hero, helping to push subscription and services-based revenues to $49 million — more than double year-over-year.
So, what’s the problem?
SQ Stock Is Overheating
Fundamentally, there’s not much to really nitpick. Square continues to carve off large hunks of growth despite a bevy of competitors, such as PayPal Holdings Inc’s (NASDAQ:PYPL) PayPal Here and Intuit Inc’s (NASDAQ:INTU) GoPayment.
The worry is on the technical side.
Square hasn’t faced any sort of technical resistance since late April, when it cleared back above the $18 level that it retreated from since late February. Its 50-day and 200-day moving averages are long in the dust. SQ stock even has plenty of distance between it and its shorter-term 20-day moving average.
But the Relative Strength Index (RSI) has been overbought for weeks, and is only getting frothier. The last time Square stock traded at such a high RSI was back in February, following its post-earnings gap higher — after that, the stock responded with a six-week consolidation period before it made its most recent up-leg.
Square isn’t in any longer-term danger short of the absolutely unforeseen, and even its valuation — at 5 times sales — while high, isn’t astronomical for the results Square has been pumping out.
But a breather could be nigh, and given Square’s last one, it could be considerable. For some, it could mean it’s time to take profits, while for others, it might mean selling covered calls against SQ stock to generate income amid flat trading.
But banking on significantly higher prices in Square in the short-term — especially with Q2 earnings a couple months away — is a low-percentage bet.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.