In 2017, Square (NYSE:SQ) surged more than 150% for the year but closed well off its highs. It had many skeptics questioning its valuation and poking holes in its story. Many thought that SQ stock had seen its highs and would consolidate or decline in 2018.
Instead, it’s been body blow after body blow to the shorts. SQ stock ended 2017 trading at less than $35 per share. Now trading at nearly $81, shares are already up more than 130% for the year.
Now what? Honestly, I can’t imagine paying up and buying SQ stock now. If you missed it when shares were trading near $20 or $30, chasing up here does not present a favorable risk/reward. Trading is different than investing, though, and nimble traders can still find an edge in SQ stock.
Valuing SQ Stock
The mobile payments space remains red-hot, as both Square and PayPal (NASDAQ:PYPL) can attest to. Square’s position in small- and medium-sized businesses and restaurants is driving a long-term subscription-like revenue base. It only makes sense to sacrifice today’s income to makes its base larger for tomorrow.
As evidence of such, subscription and services revenue rose 127% year-over-year last quarter, far outpacing overall revenue growth of 48%.
What makes SQ stock such an expensive play based on earnings but attractive from a long-term standpoint is that it has serious earnings potential down the road. That’s clear by its 57% revenue growth in 2018 and almost 40% expected growth in 2019.
Shares of Square currently trade at 173 times this year’s earnings. However, the company clearly isn’t an earnings story yet. That’s despite earnings growing 66% this year and forecast to accelerate to 76% in 2019.
The question isn’t whether SQ has a good product or whether it’s a worthwhile long-term investment. The question is, is it too late?
After rallying from $14 at the start of 2017 to almost $81 now, we’ve seemingly missed the train. Particularly as free cash flow and operating cash flow — which surged from July 2016 to July 2017 — have been coming under pressure lately. Although it’s worth noting that margins have been steady.
The make or break? While SQ generates a non-GAAP profit, earning a true GAAP profit could jumpstart the bulls and push shares even higher. Conversely, the company has beat on earnings and revenue estimates for 10 straight quarters. Coming up short could derail the bull train and cause investors to take profits.
The value Square provides its customers and its vast, growing network shouldn’t be underestimated. However, that doesn’t mean we chase it at any price.
Trading SQ Stock
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Like we said toward the top, there’s a difference between buying in as an investor and trading SQ stock. At the very least, those looking for a longer-term buy setup should wait for a decline to uptrend support (thick black line). That’s also where previous channel resistance (dashed black line) comes into play. So this level should be serious support, at least on the first test.
Below that, look for moving average support to come into play. Below the 100-day, and I would grow concerned for SQ stock because that has been very solid support for more than two years.
For short-term traders, take note of the smaller trading channel SQ stock has adopted lately (thin black lines). After breaking out over $72.50 (purple line), Square has been on fire. In fact, range resistance has even given way. For those with one foot out the door, see how shares handle the $76-ish area. A break below $75 likely sends Square back to $72.50.
Below that and the long-term trend comes into play, which should at least give shares a bounce. Two analysts recently assigned price targets in the mid-$80s, implying more upside. Many shorts don’t think that’s possible. But up over all of its channel resistance levels and without an overbought condition, it’s certainly not off the table.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long PYPL.
