Traders in Square Stock Must Balance Long, Short Term

Is the decline in Square (NYSE:SQ) stock finally ending? Since falling to the $55 per share range over the last week, an analyst upgrade has helped to boost the stock off recent lows.

Twitter's Been Hot, but Square Stock Still Is the Better Buy

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To be sure, SQ stock continues to show the signs that took it above $100 per share one year ago. However, traders dumped the stock following the last quarterly report despite an earnings and revenue beat. Moreover, the valuation remains elevated.

Despite growth that remains vigorous, an uncertain economy has likely caused investors to question its high multiple. Although SQ looks poised to move much higher eventually, investors must also contend with how to succeed with Square shorter-term.

Square Bolstered by Heavy-Hitters and Future Prospects

SQ stock also received a recent upgrade to an “outperform,” this time from Wells Fargo (NYSE:WFC) analyst Timothy Willi. Willi believes the negative sentiment around Square will soon change.

Eventually, I agree. No doubt Square has some heavy hitters behind it. Its current CEO, Jack Dorsey, also runs Twitter (NYSE:TWTR). Moreover, one of the co-founders, James McKelvey, serves on the Board of Governors at Washington University of St. Louis and as an Independent Director at the Federal Reserve of St. Louis.

However, what SQ stock has started to become makes it a buy in the long-term. It thrives because it continues to create what will become the Apple (NASDAQ:AAPL) iOS or Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Android of the finance world. Square Capital, Square Point of Sale, Square Payroll, and the Cash App are some of the apps that will make this a one-stop-shop for all things money in an increasingly cashless society.

Also, as Jamie Johnson mentioned, Square wants to enable stock trading within the Cash App. This could place the likes of TD Ameritrade (NASDAQ:AMTD) and E-Trade (NASDAQ:ETFC) at a competitive disadvantage.

Furthermore, the company will soon launch an e-commerce platform which potentially threatens Shopify (NYSE:SHOP). If they receive a long-awaited charter to form a bank, numerous other established businesses could feel the competitive squeeze. Despite the recent drop (or perhaps because of it), this makes SQ stock look appealing after it has fallen about 40% from its 52-week high. However, none of this changes the fact that the stock has slid on concerns about the overall economy and a disappointing second-quarter earnings report.

How to Trade SQ Stock

Succeeding with SQ stock both now and later involves balancing its long-term prospects against its short-term struggles. SQ reached its all-time high of $101.15 per share about a year ago. However, the fall 2018 stock swoon would cut its value in half. The current recovery reversed course on slowing growth and the surprise sale of its food delivery division, Caviar. The temporary inversion of the yield curve, as well as overall fears about the economy, likely fueled the decline further.

Admittedly, due to this drop, SQ stock now looks like a more compelling buy from a fundamentals standpoint. Analysts forecast 63.8% growth this year and 42.9% in fiscal 2020. With these types of earnings increases, many investors will willingly pay the current 55.2 times forward earnings under most circumstances.

However, that does not necessarily indicate the stock has stopped falling. Moreover, the near-term outlook on the economy remains uncertain. With Square stock still trading well below 50-day and 200-day moving averages, I do not think investors should assume the recovery has begun.

I think this situation creates two buy points. The 50-day moving average stands at about $65 per share as of the time of this writing. If SQ stock can sustain itself past this point, I see it as a buy. Also, the 52-week low from the stock slump of last fall took Square stock to a low of $49.82 per share. If it can bounce back from the $50 per share range, I would also recommend buying at that point.

However, at its current level, SQ stock lacks a direction or a catalyst. I recommend traders watch it for guidance and support. Until it has both of those, I would wait to buy.

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.

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