There’s no denying Square Inc (NYSE:SQ) is one of the year’s most rewarding trades. SQ stock is up nearly 100% since the end of 2016 and appears to still be going strong.
It’s the kind of momentum that’s inviting to newcomers, with visions of an even higher Square stock price dancing in their heads. Our very own options trading expert Chris Tyler recently agreed, noting that “SQ stock is already finding classic and solid investor favor on Wall Street,” which he felt was an indicator that SQ stock would continue going up.
The underlying fundamental progress and new business initiatives certainly provide the bulls with plenty of fodder for the kind of table-pounding that can further pump up SQ stock.
This is one scenario where I’m just not ready to dive into a new long trade, though; not because Square is a bad company, but because I fear the SQ stock price is disconnected from the company’s actual prospects and taken on a life of its own — a life that could stop and turn on a dime.
The Bullish Fundamental Case…
You know the company even if you don’t know you know the company. Square makes and markets those little white cubes that attach to one’s smartphone and turns it into a credit card payment machine. The company has been around for a few years now, but continue to gain traction.
That may be simply because it solves a real problem for small businesses in a very elegant and affordable way.
The proof? A recent survey taken by KeyBanc Capital Markets found that although 60% of Square’s users have received lower-cost offers to provide the same kind of credit card processing services, 80% of those respondents said they were sticking with Square at least for another year. Users just like the way Square works, and that shows up in the growing numbers.
Note that while revenue continues to grow at a brisk pace, the company’s persistent losses are starting to shrink, nearing break-even levels. Profitability is within sight, and that’s what may be driving the stock sharply higher this year.
In the meantime, with a sizeable base of small business customers in tow, Square is wading deeper into alternative lending and is even seeking to establish a physical bank presence. Though it’s unlikely Square would be able to disrupt the bigger banks like Bank of America Corp (NYSE:BAC) or even make waves for a beleaguered LendingClub Corp (NYSE:LC) — at least not initially — in the online lending arena, it doesn’t need to dethrone anyone. Any new business on either front will be an incremental addition to the top and bottom lines.
Nevertheless, as the old phrase goes: timing is everything… and now is not the time.
… is Overwhelmed by the Bearish Technical Case
They say a picture is worth a thousand words and “they” are right. This picture of the SQ stock price rally is impressive to be sure, but arguably too impressive. This is what, in trading circles, is called a “bubble” that’s been inflated more by hype and less by plausible, within-reach reality.
It happens. It happens a lot, actually. And there’s certainly no guarantee the bubble will pop anytime soon, if ever; traders have managed to talk themselves into keep a stunning number of other bubbles inflated of late.
Make no mistake, though. The ingredients for a meaningful meltdown are in place. It’s just a matter of finding the right catalyst (or for the bulls, avoiding that catalyst). The risk is much greater than the reward for SQ stock newcomers, regardless of the credible bullish thesis.
The line in the sand is the 50-day moving average (purple, currently at $26.81). Should SQ stock convincingly break under that ever-changing line again, it may well start the brewing chain-reaction of profit-taking.
“Convincingly” is the key word there. Square stock has fallen slightly below its 50-day moving average line a handful of times since late last year and it hasn’t meant much. It would take a failed recovery effort under that mark followed by even-lower lows to start the selling avalanche. Once it gets going in earnest, though, there’s nothing on the chart — like a previous low or logical floor — to stop the bleeding anytime soon.
Bottom Line on SQ Stock
Again, don’t read something into the above outlook that wasn’t actually written. Square — the company — has an encouraging future, but SQ stock looks ripe for some profit-taking, regardless of the back-story.
Though a short-term ebb and flow theoretically shouldn’t matter to true long-term investors, given the scope of the pullback potential following a ten-month doubling of the Square stock price, a relatively small correction could still take a relatively big toll on newcomers.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.