Square (NYSE:SQ) stock is down 20% from its summer highs. This is the third time this year that it has fallen at least that much from about the same levels. As such, I consider this whole year as a consolidation effort. From a technical perspective, this means that the rally will be significant if and when they clear it. However, first things first, and that’s to find footing. SQ stock has shown support here in recent history.
SQ bounced 40% from this level In October, July and January. This is proof that the buyers are willing to take a chance on it at these levels. However if it fails, the battle reverts $35 lower. There there will be stronger buyers along they way to help stop the slide.
So far we’ve discussed the technical aspect of Square stock. The fundamentals arguments for it are a slam dunk. In the long term, the company has positioned itself to benefit from the current trends. The world has accelerated its pursuit of digital transactions and SQ is right in the thick of it. They have their finger on almost all aspects of fintech. This also includes crypto, which is always an exciting arena.
Finally, everyone agrees on this migration from traditional finance to electronic. I am a fan of the concept and I use PayPal (NASDAQ:PYPL) on a daily basis. I have also delved into the crypto space because it just makes sense to do so. Just from the money transfer aspect, it is almost instantaneous and incredibly cheap.
SQ Stock Has a Healthy Valuation
Square’s financials support its valuation. I am by no means saying that it is a cheap stock to buy. Value is relative and it’s important to know the metrics that matter. Management more than quadrupled its revenues in 3 years. Its net income is now positive and improving fast. Gross profit is now $4 billion on a trailing 12 months. In 2018 it was barely over $1 billion. Price-to-sales is under 7x. For context, that’s as cheap as Apple (NASDAQ:AAPL). Clearly Square is doing things right and the stock will be fine in the long term.
All this positivity swirling around, yet SQ stock keeps falling. This is through no fault of its own. Rather, Wall Street is hating on the whole sector. PayPal and Visa (NYSE:V) are in even worse shape; MasterCard (NYSE:MA) is just as bad. Investors are fickle, so they fall in and out of love quickly. Eventually they will come around because it just makes sense.
However, there is a caveat here and it comes from the overall market conditions.
The indices made new records last week, especially tech. From this altitude we are susceptible to sharp and sudden corrections. In the meantime, investors can still cautiously accumulate stocks that they fancy. At these levels, Square stock makes sense for partial new positions. Going all=in is wrong; leaving room for error makes sense.
Accumulate Square for the Long Term
Those who are already long SQ should probably wait. We have not learned anything new about the company or the sector in the last few weeks. Therefore, acting now to manage risk would be a blind move. We just need more clues and patience.
This is a perfect application for using options instead of equities. With options we can deploy bullish positions without any money out of pocket and with room to spare. Options carry a bad reputation, but that’s due to ignorance.
In situations like these, options make more sense because they reduce the risk. The modern investor has numerous tools at their disposal. Choosing to ignore them means willingly passing up on help.
On the date of publication, Nicolas Chahine did not have (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.
Nicolas Chahine is the managing director of SellSpreads.com.
