It’s an interesting situation when a stock suffers a price drop ahead of earnings season. That’s the scenario facing Square (NYSE:SQ) stock, and traders might wonder whether to buy shares and hope for the best, or just stay away in anticipation of further declines.
That’s a valid question, and some investors might find it difficult to get excited about SQ stock as the company’s third-quarter earnings announcement approaches. Nov. 6 is the due date, and the stakes are high as this could be SQ stock’s chance to stage a recovery — or sink further into the abyss.
Hard Times for SQ Stock
It’s hasn’t always been a rough ride for Square stock holders, as the price has appreciated considerably since it was in the teens back in 2015. The company is known as a leader in the point-of-sale, or POS, mobile-payment space. As Dakota State University academics observe in a research paper on mobile payments, the company’s Square Register POS mobile-payment platform “supports both transactions from a credit card reader and keyed-in transactions”; moreover, “Three types of credit card readers are supported,” including ones for magnetic-stripe cards, traditional-chip cards, and contactless chip readers.
In other words, Square’s been in the POS mobile-payments game for a while, and the Square stock price is much higher than it was several years ago. That’s not particularly comforting, though, for traders who bought SQ stock shares immediately prior to the Q2 earnings report on Aug. 1.
Since Square announced Q2 earnings of 21 cents a share — beating the analyst community’s projection of 17 cents — SQ stock has lost more than 12%. That decline is surprising, not only because of the beat, but Square’s net revenues showed a year-over-year increase of 44%. Meanwhile, in the same period, payment processors Visa (NYSE:V) is down less than 1% while Mastercard (NYSE:MA) is up just shy of 2%.
It would seem logical, then, that investors should have celebrated and bid the Square stock price up.
We should all know by now, however, that the markets aren’t always logical. It wasn’t the earnings or the revenue, but the guidance that dampened investors’ spirits: Square announced Q3 guidance for adjusted earnings per share of 18 cents to 20 cents, while the analysts (on average) had estimated that it would be 22 cents.
Panic Sales Can Be Your Best Opportunities
So, as usual, panicky traders carried out the absurd “sell my shares now and ask questions later” policy which causes perfectly intelligent retail investors to needlessly sell their stock at a loss. As it turned out, the Square stock price remained fairly steady since the Q2 announcement, and soon the Q3 announcement could provide SQ stock holders a chance for a full recovery or even better.
Indeed, I expect the company to easily beat analysts’ expectation of $597.5 million in Q3 revenue. Bear in mind that Square’s year-over-year revenue in the second quarter were up by a whopping 46%, with Square generating $1.17 billion in revenue (its first billion-dollar quarter); suffice it to say that this company is making money and will continue to do so.
If unexpectedly low guidance is what dragged the Square stock price down last time, then that’s a beautiful setup for a positive Q3 earnings surprise. Not that it would be a surprise to me — on the contrary, I’ve got high hopes, but Square opted to dampen expectations last time around, which companies sometimes do in order to prepare for a comeback three months later.
The Takeaway on SQ Stock
To be completely honest, I never thought that SQ stock should have left the $80 level in the first place. Now that Square shares are trading at a depressed price and the upcoming earnings announcement could propel Square stock back to $80 or even higher, we can take take advantage of this opportunity — and, if I may say so, get a square deal with Square stock.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.