Another jittery week seems to be upon the markets as news headlines highlight that the U.S.-China trade negotiations may be at an impasse. Trade is not a zero-sum game and tariff tiffs will likely affect many companies, countries, and consumers at different levels. Understandably many investors are beginning to get nervous as to where stocks in their portfolios may be headed next. Therefore, today I’d like to discuss the short and long-term outlook for Square (NYSE:SQ), the mobile-payments company.

Fintech is an evolving and growing industry. And the global economy is gradually shifting from cash to cash-less payments. With its strong small business focus and proactive management, Square stock is likely to weather the long-term ebbs and flows of the industry. However, there might be further weakness in the SQ stock price — after losing 9.2% in the past month — in the near-term that potential investors should anticipate.

Square’s Growing Ecosystem

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 most recent earnings report released on May 1 and accompanying shareholder letter provide a good overview of the growth in service offerings.

Square’s 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, SQ management is now aiming to make the company a major player in the fintech apps sphere as well as a small business platform that offers a wide range of services.

For example, SQ’s peer-to-peer mobile payments Cash App has more than 15 million monthly active customers. Square charges 2.75% per transaction to businesses that accept Cash App payments. It also makes money through individuals using the app.

Management would like to see the Cash App become more like a traditional bank whose core customers are small businesses as well as individuals. As the younger generations especially are making a drastic shift to using electronic payments, Square would like to capture that growth.

In October 2018, the group announced Square Installments, which lets customers pay in monthly installments. Previously, Square had also launched Square Capital, which provides short-term loans to small businesses that use its service to process credit card payments.

Clearly, Square is expanding its services and merchant ecosystem across different channels and many growth investors are bullish long term on Square stock. However, they would need to pay special attention to how each business that Square is now chasing contributes to the bottom line.

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

What Could Derail Square Stock Fundamentally?

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

Such a big industry inevitably attracts both domestic and global competition. Square faces competition from many well-capitalized 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.

To be sure, not every area Square expands into will necessarily translate into easy money. Unless Square increases its revenue base, Wall Street may not be too forgiving about the SQ stock price. Therefore, from a valuation point of view, I’d urge long-term investors to exercise caution with the current price levels.

For example, many analysts are expressing doubts over Square’s expansion into the loan business and questioning whether the company is taking on too much risk.

Another are of potential concern would be declining growth in transaction fees, which still provide the majority of revenues. Square’s shifts toward subscription and services revenues may not be enough to make up for the decline in transaction fees.

The May 1 earnings report showed that the group’s gross payment volume (GPV) grew to $22.6 billion, at a relatively modest rate 27%. Yet Wall Street was concerned about this growth rate.

In other words, shareholders would need to decide whether the company has potentially diversified way too much and away from its core business of payment processing. Therefore, they’d need to regularly re-assess their views based on company and sector developments as well as earnings statements.

Where is Square Stock Price Now?

Let us briefly remember how SQ stock price has acted over the years.

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.

With such high return on initial investments, many investors look at the future through rose-colored glasses as they tend to assume growth rates will accelerate for many years. That’s how recent IPOs usually become momentum stocks. However, if growth decelerates, then the stock price usually suffers. In other words, a momentum stock like Square trades in line with revenue growth trends and expectations.

Despite the euphoria in the first three years, SQ stock price has been exhibiting price weakness since all-time high on Oct. 1, 2018. This year, although the stock is so far up 16%, April and May have not been good months for shareholders. The weak Q2 guidance issued during the Q1 conference call triggered the recent downtrend.

If you are looking for an entry signal to buy SQ shares, from a technical chart perspective, I am not expecting the stock to make a significant leg up any time soon. Square stock will need to stabilize and build a base again before a long-term sustained leg up can occur.

And, I do not expect the SQ stock price to reach the $100 level any time soon; the market may be starting to price the stock with a more realistic and fair view.

The daily volatility of Square stock is high, giving it a broad trading range, so short-term traders should proceed with caution. Expect nearer-term trading in SQ to be choppy at best.

So Should You Buy SQ Stock in May?

I believe the volatility and selling in the markets will continue in May as well as in June. Like many momentum plays, SQ stock is likely to be a battleground between two camps: investors and traders.

Depending on news headlines, Square stock may trade sideways for several days, only to continue to pullback toward the low-$60’s level, where it is likely to find initial support.

If the support around $60 level does not hold, then it may fall further to $50 level, where I’d expect SQ stock to start to stabilize and then trade sideways until the next earnings release, expected in late July.

Indeed, Square stock may become one of the first momentum stocks to test the lows it saw between $49-50 in December 2018, hence making a double bottom in technical charts. Only then the twice-touched low may become a more reliable long-term support level.

In other words, I’d not rush to buy Square stock yet. However, I’d get ready to initiate a position as the price declines further, toward $50. I’d also consider buying covered calls in conjunction with going long on SQ shares.

If you already own the shares, you might want to stay the course and hold your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to date.

Bottom Line on Square Stock

Stocks suffer during times of uncertainty and the current political and economic fundamentals offer plenty of questions. Therefore, I’d encourage potential new investors to wait for a few weeks until the smoke clears from the markets and until buyers are definitively back in control in Square shares.

Until that time, Square is likely to be a one-step forward, two-steps back kind of stock until it reaches low $50’s level. On a final note, if the SQ stock price declines further amid a subdued earnings season, the company could very well become a takeover target.

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