Square (NYSE:SQ) has reached an inflection point. After losing over one-fourth of its value during the spring, Square stock has now recovered to its February highs.
This leaves traders wondering where SQ goes next. The increasing influence of Square could eventually make the company one of the biggest in tech. Consequently, this growth has taken the company to high valuations.
While this portends well for the future of the company, whether to buy SQ stock at these levels remains unclear.
Square Is the Next Tech Giant
Square is so much more than a competitor to PayPal (NASDAQ:PYPL). Long term, SQ stock will become the Apple (NASDAQ:AAPL) or the Amazon (NASDAQ:AMZN) of finance. It has begun to follow in Amazon’s footsteps by becoming both a conglomerate and an ecosystem, and ultimately, a disruptor.
The company started by enabling every smartphone owner to accept credit cards. It has since moved into point-of-sale systems and can now handle other business functions such as payroll, funding, and marketing. It has also enabled website creation through its purchase of Weebly. Late last year, Square even made a second attempt to become a bank. This approval would allow them to accept deposits.
All this will combine into the same ecosystem, one that could do to many industries what Netflix (NASDAQ:NFLX) did to video stores and cable television. If nothing else, it makes Square’s point-of-sale system a more compelling offering than the ones built by a company such as NCR (NYSE:NCR).
The increasingly cashless society also plays into the firm’s plans well. Square’s Cash App serves the same function as banks from a consumer standpoint. This could leave investors and consumers may question the future need for a Bank of America (NYSE:BAC) or a Citigroup (NYSE:C). While I believe it is too early to predict the destruction of large banks, it could force radical changes to their business models to survive.
Consequently, the question as to whether to buy SQ stock has become one of when and not if to buy. Like other disruptors, SQ trades at a high price-to-earnings (PE) ratio. Analysts forecast average annual profit growth at 46.1% for the foreseeable future. Hence, the company can attract investors even with its forward PE of around 73.
The Charts on Square Stock
Without fundamentals, analysts will evaluate Square based on charts and momentum. SQ happens to trade at a critical level. At around $82 per share, Square stock trades almost 20% below its all-time high of $101.15 per share. It has also reached the approximate price point from which it pulled back in February.
If it sustains itself above $82 per share, I think it will run higher in the near term, perhaps even retesting levels above $100 per share. A pullback could mean that it retests support in the mid-$70s per share range.
It could also portend the beginning of a trading range between the low $60s and low $80s per share level.
Another critical point could come Aug.1 when the San Francisco-based financial tech firm reports earnings for the second quarter. Since SQ will likely report an earnings beat, investors should watch forward guidance. This could provide the catalyst needed to drive Square stock for the foreseeable future.
The Bottom Line on Square Stock
Investors need more clarity on the equity’s direction before buying SQ stock. Square supports a massive growth rate and continues to make the moves that could make its ecosystem one of the most influential in all of tech.
However, the price of Square stock has reached levels where it pulled back in February. At this point, investors need to know that SQ is not forming a double top in the low $80s per share range.
If it closes in the mid-$80s per share range or higher, it could retest that $101.15 per share high. If it pulls back, investors should wait until the stock finds its next inflection point.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.