Why Square Is Just Getting Started

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Businesses are re-opening and to say the least, it’s going to be a challenge. But when it comes to a new socially distanced normal, it’s time to embrace Square (NYSE:SQ) and SQ stock as an unusually fit winner off and on the price chart. Let me explain.

sq stock
Source: Jonathan Weiss / Shutterstock.com

It’s been a great run in mobile financial payments disruptor Square. SQ stock is up just over 150% since bottoming, as the novel coronavirus cratered risk assets amid an uncertain socioeconomic impact. And to be clear, that recovery is still a big unknown. Nevertheless, the best for Square investors appears to be on the horizon.

Square has come a long ways from its well-known mobile credit card reader, which catered mostly to smaller businesses in need of less costly payments solutions. That’s still important. But it would be a costly mistake to not see Square as smartly situated for even greater success.

Square Is Growing

The company has built a powerful suite of payment and loan solutions through its hardware and services. And the strategy has yielded big-time results thus far. Over the last decade, payment volume has increased to more than $100 billion annually.

Its loan business is also growing. The company’s Cash App has 24 million active users which rely on the platform for mobile person-to-person transactions, investments, and even a bitcoin exchange.

Moreover, there’s room for even larger growth ahead for this $36 billion market cap.

For one, Square’s current $100 billion slice of the payment processing market is still small potatoes. It may sound like a lot, but global card payment volume is forecast at $45 trillion by 2023. Supporting that promise, not only has the company been making inroads into capturing larger merchants, but with Covid-19 related ‘filthy money’ concerns and as much as 80% of transactions still made in this capacity, Square is set up to prosper.

There’s also the Square Online Store to assist with gaining market share. The platform allows the company to cash in on merchants doing business without a brick and mortar presence and in need of a comprehensive solution. So far, early indications look promising.

That’s not all. The company’s lending business is ready to get much larger after obtaining a banking charter. The launch of Square Financial Services will allow it to ramp up growth in ways not possible under it’s already very successful Square Capital unit.

But I’m still not done. The door for Square’s Cash App has also just cracked open despite revenues rocketing nearly 200% to $528 million. Sure, competition from the likes of PayPal’s (NASDAQ:PYPL) Venmo, Apple (NASDAQ:AAPL), and Alphabet (NASDAQ:GOOGL) can’t be dismissed. But growth leading into its current base of 24 million has been solid. And with management’s vision for additional lending and savings account opportunities in the wings, a triple in active users the last two years is likely far from finished business.

SQ Stock Monthly Price Chart


Source: Charts by TradingView

Square looks equally well-positioned on the price chart to move higher from here. As good as the gains off the March low have been, shares are just now breaking out above resistance from a much larger corrective period nearly two years in duration.

Technically, I’d define the period as a now full-developed ‘irregular’ ‘W’ or double-bottom base. Immediately in front of the Covid-19 pandemic which sent the market and Square tumbling in late February, a breakout through the base’s mid-pivot was staged. The subsequent failure sent SQ stock tumbling more than 60% while also dismantling the pattern’s second higher-low pivot.

In the context of a history-making bear market and an almost as dazzling rally in just more than two months, the former base still looks worthy of embracing bullishly despite its flaws. And now Square stock is going about some unfinished business as shares trade above the ‘irregular’ base’s mid-pivot in a second definitive attempt at breaking out.

From today’s prices the first obvious challenge is the base and all-time high near $100. That offers about 16% of upside potential. To be honest, that’s not particularly attractive. The fact is, Square has a history of volatility, which in our estimation warrants a stop-loss of at least 15% for today’s stock buyers. And as most would agree, that ratio of risk-to-reward isn’t enough to justify a purchase.

The good news is investors shouldn’t lose sight of the big picture and that makes the playing field a lot more approachable. I’d conservatively forecast a base breakout through $100 as paving the way towards $150 in Square over the next several months to year, given the size and length of the pattern. With an options spread to hedge that stock proposition, there’s a good deal more to like about owning Square right here and right now.

Investment accounts under Christopher Tyler’s management owns positions in Square (SQ) its derivatives, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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