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The Bitcoin Bet Is a Big Part of Square Stock’s Volatility

It has been a roller coaster year so far for Square (NYSE:SQ) investors. After closing as high as $276.57 (Feb. 19) and as low as $197.13 (May 13), SQ stock is now trading in the $224 level. Within three dollars of where it started in 2021. In other words, the spectacular growth phase of 2020 — when SQ gained 245% — is over. The question is, what happens next?

Image of Square (SQ) logo on a mobile phone

Source: IgorGolovniov / Shutterstock.com

Before last year’s explosive gains, Square shares were effectively stalled for two years. Are we entering into another period of extended stagnation? Increased volatility? Or, after rallying 12% over the past week, is SQ stock going to return to growth mode?

There are a number of variables in play here, but the signs are generally positive. At a price that’s nearly identical to its 2021 start (and off its 2021 high by 19%), this Portfolio Grader ‘B’ rated stock is worth looking at.

SQ Stock: Square Blows Past First-Quarter Estimates

Square investors had to be happy when the company announced its first-quarter results on May 6. Let’s first look at what Wall Street was expecting: total revenue of $3.3 billion, transaction-based revenue of $865 million, gross payment volume of $30.4 billion, gross profit of $831 million, and adjusted earnings per share of 17 cents.

Here’s what Square reported. Total revenue for the quarter was $5.06 billion. Transaction-based revenue was $960 million. Gross payment volume was $33.1 billion. Gross profit was $964 million. And Square delivered adjusted EPS of 41 cents.

Square completely blew past projections for the quarter. Revenue was over 50% higher than expected! Naturally, SQ stock popped on these results, but the reaction was short-lived. Just a week later SQ closed at its lowest point in 2021. There were concerns that government stimulus payments in April 2020 will skew gross profit growth rates for the second quarter. Square also projected its operating expenses will increase more than expected in 2021 — an additional $1 billion, compared to the expected $800 million to $900 million.

However, Square’s performance showed that the mechanics driving SQ stock’s rapid rise in 2020 are still in effect. Consumers are still spending money using Square, sellers are still processing sales using Square, and people are still transferring cash (Cash App profit growth was up 171% YoY). 

Reopening the Economy Means Consumers Will Start Spending Again

As the U.S. economy begins to re-open, consumers are expected to start spending. Sure, they were buying online during the lockdowns. But many also accumulated extra savings with vacation, eating in restaurants and other activities curtailed. Many people worked from home, cutting their commuting, clothing and food costs. As a sense of normalcy begins to return, consumers will start spending again. In the U.S., that excess consumer cash amounts to about $2.6 trillion.

The expected explosion in consumerism is going to benefit many companies that have seen their sales hurt by the pandemic. Farmer’s markets and craft shows are starting up again after many were shut down last year. With online and in-store payment solutions, Square is set to benefit from the ramp up in spending through its network. As groups return to restaurants and bars with friends, you can bet they’ll be using Square’s Cash app to transfer money back and forth. 

The Crypto Question

One of the wild cards in the Square equation is the company’s crypto bet. Square turned heads in 2018 when it integrated the buying and selling of Bitcoin (CCC:BTC-USD) in Cash App. That move appeared to be paying off in a big way. Last November, quarterly Bitcoin revenue through cash app hit $1.63 billion, a greater than 1,000% YoY increase. In February, the company bought $170 million in Bitcoin. In its latest quarter, Bitcoin revenue hit $3.51 billion, an elevenfold increase YoY.

That all sounds great, except Bitcoin prices crashed in May. In fact, the start of the Bitcoin crash on May 11 corresponds perfectly to a 6% drop in SQ stock. A day later, SQ closed at $197.13, its lowest level since last November.

Square’s Bitcoin bet has helped to gain Cash App users and boosted revenue. But it has also been a big part of the recent volatility in SQ stock.

Bottom Line on SQ Stock

At the end of the day, Square is positioned to benefit from the re-opening of the economy. Long-term, this stock’s growth prospects look good. 

However, whether you choose to take the plunge on SQ stock now really depends on how you feel about Bitcoin’s prospects. The price is right, and if Bitcoin recovers, that will take a lot of downward pressure off SQ. The rally could quickly become a recovery and full-fledged return to growth. If Bitcoin falls further, that’s another story. I suspect there would be further short-term pain for Square investors — although ultimately, that would translate to an even better buying opportunity.  

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Article printed from InvestorPlace Media, https://investorplace.com/2021/06/sq-stock-the-bitcoin-bet-is-a-big-part-of-squares-volatility/.

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