On Nov. 6, digital payments company Square (NYSE:SQ) released its third-quarter  financial results.

Square stock has been at the forefront of the fintech (financial technology) revolution. Both the company and the owners of SQ stock have been benefiting from the disruptive shift from physical money to digital financial services and products.

In 2019, the SQ share price is up about 15%. In the wake of the Q3 results, I believe that the owners of Square stock may have to reset their overly optimistic growth and share price expectations for the rest of the year. In the coming weeks, I’d be a buyer of SQ stock below $60, especially if Square stock approaches or goes below $55. Here are the important fundamental and technical issues that are affecting SQ stock.

Analyzing Square’s Q3 Results

Square’s Q3 revenue and earnings came in above analysts’ average outlook. However, the company lowered its full-year guidance.

Its total revenue increased 44% year-over-year to $1.27 billion. Its earnings per share, excluding certain items,  was 25 cents, beating the average forecast of 20 cents.

The company’s quarterly gross payment volume (GPV), or the total volume of payments the company processes, increased 25% YoY to $28.2 billion.

Management noted that Square Terminal and Square Register, SQ’s newest hardware solutions, are enabling the company to cater to larger businesses, helping drive up Square’s GPV. When SQ reports its Q4 results, investors are likely to continue to pay attention to this number.

The Q3 report once again confirmed that SQ stock is growing rapidly, thanks to its seller ecosystem and Square Cash, the company’s consumer digital money transfer service.

In general, growth stocks are far more volatile than market indices or mature companies. Whenever investors feel expectations for growth names need to be toned down, they sell the companies’ stocks first and ask questions later.

For fiscal year 2020, SQ’s management expects low-30% YoY adjusted revenue and gross profit growth. That was viewed as  disappointing by investors.

Therefore, SQ stock is likely to be choppy in the next few days.

Analyzing the Price Action of SQ Stock

By analyzing the price action of SQ stock, we can obtain a better view of what to expect from the shares in the coming weeks.

SQ stock went on a big tear during the summer of 2018, baking in plenty of euphoria. As a result, the shares have been weak since reaching their all-time high of $99 in late September 2018. Yet, by late December 2018, SQ was hovering around $50.

After a highly volatile first half of 2019, on Aug. 1 Square stock hit a recent high of $83.20.

However, the rest of August was not a good month for Square stock. That was partly due to its weak Q3 guidance, which surprised investors. On Sep. 24, the shares hit a recent low of $54.41.

On Nov. 6, prior to the release of its Q3 earnings, Square stock closed at $61.34. Now the shares are hovering around $65.

From a technical  perspective, I’m not expecting Square stock to make another significant leg up any time soon. In the next few weeks, SQ stock is likely to be range-bound between $60 and $67.5.

The next rally will occur only when long-term investors feel that  the price of SQ stock is justified by its future growth expectations. Consequently, investors need to be careful about chasing Square stock at this point.

Square Stock Is Still Richly Valued

Although the recent decline of SQ stock has made its valuation more attractive, the shares are still richly valued.

While SQ already serves many small businesses, Wall Street has questions about whether it can maintain its growth. Especially if the U.S. economy slows, Square’s growth may start to decelerate rather quickly.

SQ’s competition has also increased. Square must now compete with many well-capitalized companies, including the global online-payments company PayPal (NASDAQ:PYPL), Visa (NYSE:V) and Fiserv  (NASDAQ:FISV), which is becoming a global-payments giant.

The forward price-earnings ratio of SQ stock  is over 54. On the other hand, the forward P/E ratios of PYPL, V and FISV stocks are about 29, 28 and  23 respectively.

Similarly Square stock’s current price-sales ratio is over 6,3. Analysts prefer a low P/S multiple, ideally below 1x. However, a P/S number between 1x and 2x is more common. To put the metric into perspective, the S&P 500’s average price-sales ratio is 2.2x.

In short, investors are still paying a hefty premium to own SQ stock. Thus, I do not think there is much room for Square stock’s valuation to head higher in Q4. Sooner or later, SQ stock’s valuation and its revenue growth will be more balanced.

So Should Investors Buy SQ Stock Now?

Fintech is still developing rapidly in terms of total market capitalization as well as the products and services it offers. And the fintech app revolution is quickly changing the way traditional banks, credit-card issuers and mobile-payments companies work with businesses as well as with their retail customers.

Therefore, over the long-term, I would not bet against SQ stock. The shares have generated solid long-term returns, especially for those who invested early in SQ. The company is likely to  grow further as the fintech market matures.

In the short-term, though, the owners of SQ stock shouldn’t expect smooth sailing. I believe the markets are likely to be volatile in the rest of November. Like many momentum plays, Square stock will probably be a battleground between two camps: investors and traders.

SQ stock has a high beta of 3.3. The stock market has a beta of 1.0. SQ stock’s beta measures its volatility in relation to the market. In other words, SQ rises more than the market in bullish conditions and decreases more when markets are falling.

Short-term traders should exercise caution if they want to participate in SQ stock’s wide daily swings. The hype surrounding fintech stocks, including SQ, can easily cause them to rise quickly and become overvalued.

It is likely that Square stock may fall toward $60 or even $55, At that point,  I’d expect SQ stock to start to stabilize and then trade sideways until its next earnings release, expected to occur in early February.

In other words, I’ wouldn’t rush to buy Square stock yet. However, I’d get ready to initiate a position in SQ as the price declines further towards $55.