Trade of the Day: Square Inc (SQ)

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Last week was a busy one for Square Inc (NYSE:SQ), as the company has withdrawn its bank-charter application with the Federal Deposit Insurance Corporation (FDIC). However, this withdrawal is not a sign the company is looking to step back from its plans to expand the services it offers on its way to becoming a true powerhouse in the financial sector. Rather, it is an attempt to strengthen its position by withdrawing, improving and then resubmitting its bank-charter application — a smart move for a company that is positioned to expand well into the future.

SQ has two key advantages over many of its larger, more established competitors:

First, it doesn’t have any legacy businesses that need to be revamped to be brought fully into the Internet-based, online-spending age. This means it can focus all of its CapEx spending on new business lines and technology structures without having to worry about bringing old systems up to speed.

Second, it isn’t as large as its competitors, which means it can achieve larger percentage growth with a smaller amount of nominal growth.

For example, SQ had revenue of $2.21 billion in 2017, while Visa Inc (NYSE:V) had revenue of $18.36 billion. For SQ to increase its revenues by 20% during 2018, it only has to generate an additional $442 million, whereas V would have to generate an additional $3.67 billion. Naturally, it’s much easier to generate $442 million than it is to generate $3.67 billion.

Traders on Wall Street tend to focus on percentage-based growth rates, not nominal growth rates, which means they will likely be willing to pay a higher price multiple for SQ moving forward than they will for V.

Trade of the Day: Square Inc (NYSE:SQ)

SQ recently climbed to $69.40 on June 21, and we expect the stock to climb back up to that level in the run up to the company’s earnings announcement on Aug. 1, after market close.

This positive move in the value of the underlying stock, coupled with an anticipated increase in implied volatility as we approach the quarterly earnings announcement, should provide a positive boost to the value of the long call options we’re recommending now:

‘Buy to open’ the SQ August 17th $70 Call (SQ180817C00070000) for a maximum price of $2.60.

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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/trade-of-the-day-square-inc-sq/.

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