A few weeks ago, in mid-November, Square Inc (NYSE:SQ) announced that its Cash App would launch a new bitcoin pilot. The app is mainly used to send money from one person to another. However, in the pilot program it would allow select users to buy and sell bitcoin. This added fuel to the fire, helping to drive SQ stock price toward $50.
While the pilot does not allow users to send each other bitcoin, the capability to buy and sell the cryptocurrency is likely a big attraction given the widespread coverage bitcoin is receiving. On the evening of Dec. 5, CEO Jack Dorsey — who’s also the CEO of Twitter Inc (NYSE:TWTR) — confirmed that the pilot would be expanding.
So will a larger pilot program drive up SQ stock price? On Wednesday morning it did, at least temporarily. Shares were up almost 4%, but ultimately closed flat on the session. What does it mean going forward?
Bitcoin and Square
I think the bigger question is, what is bitcoin’s impact on Square? We’ve already looked at the technology that bitcoin is built on — that being blockchain — and how investors can get involved via International Business Machines, Corp. (NYSE:IBM). Is Square now the de facto way to play the so-called “brokerage” side of it?
I wouldn’t go that far, at least not yet. In fact, we don’t know how exactly Square will make money from the buying and selling. Would it collect the difference between the spread? That’s one assumption, but it’s still too early to know for sure. Heck, we don’t even know if Square will stick with its bitcoin option.
Given that the pilot program is expanding is a sign that things are going well, though. Expanding the plan, eventually allowing users to send and receive bitcoin and the ability to pay merchants with it would go a long way. I suspect that’s a ways down the road, but still, investors like to see growth potentials like this.
While many may think of PayPal Holdings Inc (NASDAQ:PYPL) and its Venmo property as the leaders in app-based money-sending platforms, think again. On the Apple Inc. (NASDAQ:AAPL) App Store, Square’s Cash App is No. 20 on the list of top free apps. Venmo comes in at No. 37 and PayPal is up at No. 43.
Square’s Cash App is popular, and a full-blown bitcoin rollout would make it even more so. If Square can find a way to make money off these transactions, it could have a lot of potential.
Trading SQ Stock
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While the SQ stock price initially jumped on this expanded pilot program news, shares basically finished flat Wednesday. What should we make of this action? I wouldn’t consider it highly bullish, but it’s not the end of the world.
With SQ stock, we saw a blow-off top as it went screaming toward $50. Coming within a hair of that level, SQ stock price hit reverse and is now resting in the upper $30s. The move was disappointing for me. I caught a good piece of the rally from August, tried to get cute and short it in September and covered for a small loss after the fact.
It’s still not cheap, despite coming hard off its highs. Although two straight beat-and-raise quarters is great, I don’t know if we’re in buy-and-hold territory just yet. I would love to see this thing (somehow) drop below $30. We’ve examined it multiple times against PayPal from a valuation perspective. Square has faster growth, but PayPal is no slouch and has solid earnings to boot. But there is a low-risk way to take a stab on SQ now.
SQ stock price is volatile, but if we buy near current levels, we can use roughly $36 as our stop-loss. A close below this mark will put it below the 50-day moving average and below a key level around $35.90. If we’re lucky, shares will catch a bounce back into the $40s. If not, we have a limited-risk setup.
The Bottom Line on SQ
Apple entering the money-sharing space via Apple Pay has to be something to consider. But theoretically, that would impact PayPal more than Square in my eyes. To buy SQ stock is a bet on small- and medium-size business and a bet on mobile. So long as the U.S. economy continues to improve, so too should Square.
I would love to be a long-term buyer between $28 and $32.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
