Square Stock Is Likely to Be Volatile in February

Financial technology (fintech) darling Square (NYSE:SQ) is expected to release its fourth-quarter and fiscal 2020 financial results in the second half of February. Square stock has returned more than 170% over the past year. After falling to $32.33 in March 2020 in the early days of the Covid-19 outbreak, the shares hit a record high of $246.49 in early January. 

Square Stock May Be Due for a Cooling Off Period

Source: Jonathan Weiss / Shutterstock.com

Yesterday Square stock closed just below $222. Its 52-week range is $32.33 – $246.49. Now investors wonder how the shares will react to the company’s earnings.

Source: Stockcharts.com

Given the recent, massive rally of Square stock, I believe most of the company’s short-term growth has been factored into the shares. If you do not yet own the stock, you may therefore want to wait for a potential decline in the stock price before buying the name. Any price near the $200 level would be particularly attractive.

The Fintech Market Is Growing

According to recent research led by Itay Goldstein of the University of Pennsylvania, “The scope of activity in FinTech started from mobile payments, money transfers, peer-to-peer loans, and crowdfunding, spreading to the newer world of blockchain, cryptocurrencies, and robo-investing. Start-up firms with new technology are racing to fill the holes in the customer experience left by traditional firms on all these dimensions.”

Square’s products and services enable transactions between consumers and merchants. The company offers a mobile-payments platform, as well as hardware, such as point-of-sale (PoS) equipment. Through its Square Capital unit, the firm has also moved into small-business lending. Twitter’s (NYSE:TWTR) co-founder and CEO, Jack Dorsey, is also Square’s top executive.

Covid-19 has accelerated society’s transformation away from cash, creating immense tailwinds for fintech firms like Square. The stay-at-home trend has increased digitalization in areas such as e-commerce, entertainment, and even health services. Going forward, analysts expect Square to increase its market share further in the digital payments market, where the total transaction value “is projected to reach $6.68 trillion in 2021.”

In October 2020, Square announced that it had bought $50 million of Bitcoin, and it released a “Bitcoin Investment Whitepaper.” At that time, the company stated:

“Square has been a leader in the bitcoin space since 2018 through our Cash App product, which provides customers the ability to buy and sell bitcoin… [T]he company formed Square Crypto, an independent team solely focused on contributing to bitcoin open source work for the benefit of all.”

The Street expects Bitcoin to become an important revenue generator for the company. Therefore, investors should expect the price moves of Bitcoin to affect Square stock, too.

What to Expect From Square’s Q4 Earnings

Square’s third-quarter results, announced in early November, were robust. Its revenue soared 140% year-over-year to $3.03 billion. The company’s gross profit surged 59% YOY to $794 million. Its net income was up 24% to $36.5 million, while its net income per diluted share, excluding some items, came in at 34 cents, up from 25 cents during the same period a year earlier. The firm ended the quarter with $3.8 billion of available liquidity.

According to the company, “In our Seller ecosystem, gross profit was up 12% year over year during the third quarter. Our Cash App ecosystem delivered strong gross profit growth of 212% year over year. We remain focused on increasing daily utility for our Cash App customers to products beyond peer-to-peer payments, which helps drive higher engagement and monetization.”

When the company reports its Q4 earnings, the Street will be interested in seeing how the Seller ecosystem and Cash App have done, especially over the holiday-shopping period. The metrics of the company’s Bitcoin operations will also be closely watched by many market participants.

Since Square released its Q3 results, Square’s stock has rallied about 50%.The forward P/E and P/S ratios of SQ stock are 169.49 and 12.66, respectively, making its valuation high compared with its historical levels.

The Bottom Line on Square Stock

Since its humble beginnings in 2009, Square has become one of the most widely followed companies on Wall Street. Its Cash App is an important part of the digital-financial world. In fact, in Q3 the app’s sales soared 574% YOY to $2.07 billion. On the other hand, Paypal (NASDAQ:PYPL), Shopify (NYSE: SHOP), and even JP Morgan Chase (NYSE:JPM) with its QuickAccept offering, are all competing with Square.  

In the coming quarters, Square stock is likely to reach new record highs. However, in the short-term, there could be selling pressure on the shares. Therefore, those who own the shares should be ready for them to be quite choppy.

Finally, those investors who do not want to devote much money to SQ stock might consider buying an exchange-traded fund (ETF) that owns the company. Examples of such ETFs include ARK Fintech Innovation ETF (NYSEARCA:ARKF), ERShares Entrepreneur 30 ETF (NYSEARCA:ENTR), and the ETFMG Prime Mobile Payments ETF (NYSEARCA:IPAY).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. 

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