Square (NYSE:SQ), the mobile-payments company, is expected to report earnings on May 1, after market close. Following its initial public offering (IPO) in late 2015, the price of SQ stock surged from $9 to an all-time high of $101.15 in October 2018 as the company became a darling among long-term investors.

Then Square stock had a rough second half of the year in 2018. And in 2019, although the stock is up 27%, it has lately been exhibiting some price weakness. Thus shareholders are now wondering if they should consider buying the stock prior to the earnings release.

Despite the overall strength in price this year, I do not think long-term investors should rush to buy into the shares just yet. When Square reports earnings this week, Wall Street will be able to better gauge the financial health of the company. Although I would not bet against SQ stock’s future, I expect to see further volatility and possible price weakness in Square stock in May. Here is why:

Square Is a Growth Stock in a Competitive Industry

Although it started as a payments company, Square has in recent quarters introduced a range of software, hardware and apps to service small businesses, individual clients and act more like a traditional bank. Its ecosystem combines software with hardware to especially enable sellers to turn their mobile devices into point-of-sale (POS) solutions. In other words, through various growth initiatives, management is now aiming to make the company a major player in the fintech sphere.

The global payments industry is a $100 trillion plus market. And the so-called fintech revolution is fast changing the way traditional banks, credit card issuers and mobile-payments companies work with businesses as well as retail customers.

For example, small vendors can now easily accept card payments anywhere and with a minimum set up effort and fees. Individuals, especially the younger generations, are also making a drastic shift to using electronic payments.

Such a big industry inevitably attracts both domestic and global competition. Square faces competition from many companies, including the global online payments group Paypal Holdings (NASDAQ:PYPL), transaction processing leader Visa (NYSE:V) and Fiserv (NASDAQ:FISV), which is shaping up to become a global payments giant.

On Feb. 27, SQ reported fourth-quarter results that beat expectations for earnings and revenue. However, the San Francisco-based company, run by Twitter (NYSE:TWTR) CEO Jack Dorsey, gave Q1 earnings guidance that came up short of expectations.

A growth stock like Square trades on forward sales as well as the momentum provided by future expectations. Therefore, since late February, SQ stock price has been in a downtrend.

Square Stock and Earnings Season Jitters

On May 1, in addition to the headline numbers, such as earnings and adjusted revenues, Square investors will pay particular attention to several numbers, including:

• Gross payment volume (GPV): Square defines GPV as the total dollar amount of all card payments processed by sellers using Square, net of refunds. In Q4 2018, the company processed $23 billion in GPV, a year-over-year increase of 28%, driven by growth in larger sellers. Wall Street tracks this metric widely.
• Growth in larger sellers: Square defines larger sellers as those that make more than $125,000 of annualized GPV. At this point, 51% of GPV comes from larger sellers.
• Square’s peer-to-peer Cash App: This mobile payment service app had more than 15 million monthly active customers in December 2018. SQ charges 2.75% per transaction to businesses that accept Cash App payments. It also makes money through individuals using the app.
• Square Capital: The business lending arm offers loans to eligible Square sellers. In 2018, Square Capital originated more than $1.6 billion in small business loans. Wall Street is worried about SQ’s potential exposure to credit risk.

While Square currently enjoys a head start in serving small businesses, Wall Street has question marks as to whether the group can maintain a sustained growth quarter after quarter.

Currently, Square is a domestically focused company and its revenue stream mainly comes from the U.S. In the U.K., it has recently launched the Instant Deposit and Cash App. Although bulls are hopeful that Square can increase its penetration into global markets in the coming years, too, bears argue that if the U.S. economy slows down considerably in the near future, the lack of geographical diversification is likely to hurt the stock price.

Therefore, most investors are likely to wait on the sidelines until they have a chance to analyze SQ’s balance sheet to see if the stock might be somewhat overvalued. They will also want to see if there is any growth fatigue or major trend changes in the industry.

Unless the numbers and the rest of the 2019 guidance are exceptional in May, SQ stock investors may decide not to invest in it for several more weeks … or even months.

So Should Investors Buy SQ Stock Ahead of Its Earnings?

Square stock is momentum-driven, hence it usually experiences big price swings after reporting earnings. In other words, it can easily gap up if the numbers are better than expected, or if the numbers disappoint, SQ stock can easily gap down, too.

The options markets are pricing in an approximate post-earnings move of 10-12% in either direction in SQ shares. In case of a favorable earnings report, my next price target for Square stock in the coming weeks is between $75 – $80.

On the other hand, any disappointment in Square’s earnings statement or future outlook could quickly send the shares to low the $60’s. At this point, through short-term technical analysis, I’m expecting further price decline in Square stock.

After the earnings results, I’d not fight the tape and would be willing to re-evaluate the technical charts in the coming days.

If you already own SQ stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5%-7% below the current price point.

After the upcoming earnings call, in case of a price drop, if you still believe in the bull case for Square stock, then you might consider waiting for a better time to buy, such as when the share price is around $65, or even lower.

If you are an experienced investor in the options market, you may also consider using a covered call strategy with a time horizon of approximately one month. In that case, you may, for example, buy 100 shares of SQ at a limit price of $71.55 (the closing price on April 26) and, at the same time, sell a SQ May 31 $71.5 call option, which currently trades at $3.85 and offers downside protection in case of volatility and a decline in Square stock.

This call option would stop trading on May 31, 2019, and expire on June 1.

The Bottom Line on Square Stock

Fintech is an evolving and growing industry. With its strong small business focus and proactive management, Square stock is likely to weather the ebbs and flows of the industry. However, there might be a weakness in the SQ stock price in the near-term that potential investors should anticipate.

On a final note, if the SQ stock price declines further amid a subdued earnings season, Square may very well become a takeover target.

Investors who are interested in growth companies in financial services but do not want to commit all their capital to a single stock such as SQ may also consider investing in various exchange-traded funds (ETFs) that have Square stock as a holding. Examples of such funds would include the ARK Fintech Innovation ETF (NYSEARCA:ARKF), the Global X FinTech ETF (NASDAQ:FINX) or the iShares Russell 1000 Growth ETF (NYSEARCA:IWF).

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.