There is no doubt that 2020 was a terrible year and a global human tragedy. More than 2 million people died and millions more are still suffering. Governments are still trying to snap out of this crisis as millions of businesses folded. In the U.S., the vaccination efforts are gaining momentum. These efforts are also international and unfolding everywhere. Part of the recovery is to find some good come out of this tragedy. The world is definitely not letting this crisis go to waste. One bright spot is that the lockdowns put the digital revolution into overdrive. A big part of that is the migration to electronic payments and finance. A standout soldier in that fight is Square (NYSE:SQ) and it’s a superstar. Square stock is on fire up 2,400% in five years.
The new kids on the fintech block SQ and PayPal (NASDAQ:PYPL) left the old geezers like Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP) stocks in the dust. For the last 12 months, SQ is up 200%, which is 14 times more than the S&P 500.
Now that we have touted their stock records, let’s discuss if it is too late chasing them to new highs. Spoiler alert, buying SQ stock near these levels is a valid thesis with a few caveats.
First we have to frame the overall stock market picture. Equities have rallied too far past what the fundamentals warrant. I don’t need charts to explain that notion. Before the pandemic started, we had ideal growth conditions, full employment and no virus. Regardless of how well we are coping, none of these are still true. If fact, it is quite the opposite because we have millions of people collecting unemployment. The economy is so bad that the government just dumped another $2 trillion into it. Oh and by the way, the virus is still in full bloom.
Yet, among all this carnage on Main Street, Wall Street stock prices have never been higher. The indices are still setting records every week in one corner or another. There is absolutely no fear! There is also no reason to be higher in stocks than when we had idyllic situations in January 2020. This is all to say that regardless of how good a time it is to own Square stock, I have to account for potential extrinsic risk.
Square Stock Is Not Cheap
Fundamentally, this is not a cheap stock but that is part of its charm. Growing fast is not easy to do on a budget. If managements of growth companies skimp they fail to achieve much that is impressive. Jeff Bezos did not build Amazon (NASDAQ:AMZN) on a budget. Reinventing the way the world transacts financially will take fortunes to accomplish. They are well on their way as the new generation would not likely follow in their parents’ footsteps.
I know my 19-year-old son won’t be ordering any checks soon. If he opens his own business, I am confident he will employ services like this or its competitors. Shopify (NYSE:SHOP) would be something that fits his needs, but he has a few years to decide. Maybe by then Visa or MasterCard will have evolved to compete for his business.
Therein lies today’s bullish thesis on Square stock. The company has set itself up for success by looking ahead. They have embraced the crypto concept especially Bitcoin. Meanwhile, old financial wizards from JPMorgan still called it a fraud up until very recently. Old dogs can learn new tricks. But by then they would have lost their top dog spot to newcomers like Square.
No, I am not a perma-fan of the stock. I do write positively about its prospects because they have delivered results. However I am realistic about the price action and am always looking for good entry levels. In my December write up I noted its rosy future. But I also suggested then that “…it should revert to the mean soon.” I also noted that “… $220 per share would be the first available pivot point,” and here is SQ just hovering near it.
Timing Isn’t Everything
I reiterate my notion from December that now is a better entry into a starter position than at the highs then. This is as long as the investors heed the warning coming from the entire market. Sometimes great stocks fall to no fault of their own, so conviction has to come down a notch. The weekly chart clearly suggests that the slant of the trend is too steep. You can peruse thousands of charts and very few would have a base that resembles this one.
So which is it, is this an entry point or not? There is never a one-answer-fits-all for this stuff. Timeframes vary among investors. What always makes sense is to avoid the obvious mistakes like buying it at its highs. On the other hand, I can’t just wait for the perfect opportunity because those are rare. It’s hard to time Square stock because it moves fast. But so do its fundamentals because management grew its sales five in five years.
Therefore the wise thing to do is edge into the full position one lot at a time. If they continue to execute like this then I expect their stock will be higher in a bullish market. Using options opens the door for dozens of strategies that allow investors to build risk buffers.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.