Square Stock Is Much Better Than the Current Selloff Suggests

More weakness may be in store, but the trend won't last forever

It would be easy to assume the worst about payments middleman Square (NYSE:SQ) at this time. SQ stock is down 30% just since its early August high, and is knocking on the door of new multi-month lows. Disappointing third-quarter guidance and the decision to sell its food-delivery platform Caviar to DoorDash did most of the damage. The weakness, however, firmed up a technical hardship that had already been plaguing SQ stock.

SQ Stock: Square Is Much Better Than the Current Selloff Suggests
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Things are likely to get worse before they get better too, given the downward momentum now in place. Don’t sweat that weakness if you’re a believer in what Square is doing though. Rather, embrace it as the beginning of an opportunistic entry.

Just don’t rush that buy-in.

Square Stock Hits a Wall

It’s not a company that needs much in the way of an introduction. Square is most often compared to the mother of online payment platforms Paypal Holdings (NASDAQ:PYPL), but it made a splash in its arena by offering card-acceptance solutions to small businesses that outfits like NCR (NYSE:NCR) or Global Payments (NYSE:GPN) didn’t seem to want to bother serving.

Founders Jim McKelvey’s and Jack Dorsey’s vision — yes, the co-founder and chief of Twitter (NYSE:TWTR) — turned out to be a brilliant one. As it turns out, the world was more than ready to meld wireless internet connectivity with payment cards. Since its inception in 2009, at least 2 million customers are now using its tech to take payments.

SQ stock rallied nicely since its 2015 IPO, reflecting the company’s ever-expanding user base and revenue.

The past year has proven problematic though. As rivals have stepped up their respective games and with most of the low-hanging fruit already picked, Square stock has fallen nearly 50% from its October-2018 high.

The market is seemingly prepared to continue selling too, now realizing past growth rates can’t be sustained. Not only is the purple 50-day moving average line now back under the white 200-day line, all four key moving averages (20-, 50-, 100- and 200-day) are now sloped downward. That scenario requires a great deal of persistent bearishness.

Don’t step in front of that train. Do, however, keep an eye out for the point where that train stops rolling. What’s working against Square the most right now is the very thing that will make Square more potent a year from now.

Look Further Down the Road

The knee-jerk consensus to the decision to dump Caviar was disappointment that Square was getting out of a business that’s quickly becoming the new norm for food consumption.

The company has also quietly conceded it’s going to be ramping-up its investments on growth. Craig-Hallum analyst Bradley Berning believes “2.7% to 3.7%” more of its current revenue will be added to its investments in self-growth. Wedbush analyst Moishe Katri didn’t offer an outlook that was quite as specific, but still acknowledged the company was “headed to a 6-12 months investments phase” that should prove “noisy” for SQ stock.

Other analysts have also expressed recent doubts.

Look a year or more down the road though, past the new pet projects like a free stock-trading platform and the relatively new Cash app, and the future looks brighter. Even Berning and Katri made a point of pointing out the margin-crimping outlays planned for the foreseeable future would yield healthy results. Berning, for instance, anticipates EBITDA will improve to the tune of 1.65% in 2020.

KeyBanc Capital Markets analyst Josh Beck, meanwhile, also made plainly clear last week that despite shrinking margins now, the return on that investment will make Square stock even more compelling. Beck maintains an “Overweight” rating on Square shares, keeping his outlook and the consensus numbers into next year and beyond in mind.

Square Stock Hits a Wall

As for abdicating the restaurant ordering and delivery business, it’s a high-profile step back to be sure. But, GrubHub (NYSE:GRUB), DoorDash and their peers aren’t terribly profitable, and the competition in that space is only heating up. Caviar could be a money-burning distraction with a limited payoff.

Looking Ahead for SQ Stock

It is the quintessential debate most investors used to have with themselves on a regular basis … is the sacrifice of profits today worth the plausible gains of tomorrow?

In the case of Square stock, it probably is … despite what would usually be deemed an outrageous valuation. Analysts certainly think so. Even with the recent selloff, the analyst community has mostly stuck with their consensus price target near $81.

The path from here to there isn’t necessarily a straight one though, with the chart suggesting at least a short-term downtrend is firmly lodged in place. It will have to run its course first.

Looking Ahead for SQ Stock

To that end, don’t be afraid to step in when matters look extremely scary; the current situation would only be categorized as annoying. Square is doing everything right. It’s traders that collectively need to reset their expectations. More selling is the only thing that will drive the stock through that much-needed process.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/square-sq-stock-is-much-better-than-the-current-selloff-suggests/.

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