Not too long ago, Square (NYSE:SQ) was the up-and-comer of financial tech stocks and could do no wrong for a while. But that is no longer true. In fact, this year SQ stock is only up 10% while Visa (NYSE:V) and MasterCard (NASDAQ:MA) are up more than three times as much.
This year SQ stock hit heavy resistance at $83 per share and has failed at every potential breakout there. Although SQ is also lagging the S&P 500 by 40%, the opportunity from here is that there is more upside potential than downside risk.
Finding bottoms in stocks is tricky. But identifying support zones that could act as a baseline for rallies is a lot easier. Square stock has fallen into such zones. Being around $50 per share has been pivotal to SQ for the last five years. So the bulls in it are on solid footing, which usually makes the case for more upside. There are no weak hands left to hold the stock after a long time of selling pressure.
Fundamentally, and even after this big correction, SQ stock is still not cheap. It still loses money and it sells at eight times sales. From that perspective it could have a lot more froth to shed. The bullish thesis for SQ has to include the assumption of strong growth. Otherwise it won’t deserve its valuation premium and it would have to reprice lower.
SQ Stock Has a Good Base for a Bounce
Technically the short-term SQ charts show clear lines to trade. Short term, SQ has an opportunity just above $63 per share. This could invite momentum buyers to target $68. But from there, SQ might get a few more optimistic buyers to try and fill the giant gap from the last earnings report. It won’t be easy, but if the overall markets rally for any reason then SQ will likely have a realistic chance to do it. But as with any good trade, there needs to be proper stops. In this case, SQ needs to sustain the high-low trend to retain the upside momentum.
As with many investments, the whole globe is migrating all financial transaction to digital. The fin-tech sector stocks will have strong demand on their products and services for years to come. SQ, V, and MA will be amidst the winners. Their management teams have so far executed well on plans so I expect them to continue.
The bitcoin craze is evidence that the world is ready for electronic financial transactions. Almost everyone I know uses one form of fintech or another. There is definitely room for all major entrants to prosper in it. SQ stock will be higher in the future if the stock markets in general don’t crash.
This brings up the important points of geopolitical risks that currently plague the headlines. The world seems like it’s a mess. But the company P&L’s don’t indicate an imminent collapse. Politicians will eventually figure things out, but in the meantime they will put investors through a whirlwind of headlines. That’s their job so they can justify their existence to their constituents. Politicians can rarely derail the whole globe on purpose especially when all central banks are dedicated to inflating economies.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
