The whole payment processing sector is doing well. As of yesterday, Square (NYSE:SQ) was up 32% year-to-date which is double the gain of the S&P 500. The metrics are just as positive for Square stock competitors, too.
But, SQ reported earnings last night and got slammed down 5% on the headline. The dive continued this morning, with Square stock falling another 5% from the open.
SQ beat both the top and bottom lines, but second-quarter guidance was lower than analyst forecasts. This is an unforgivable sin on Wall Street these days, and investors are punishing Square stock “appropriately.”
Among other points of contention, SQ management reported a lower gross payment volume than expected. The bears really sunk their teeth into this highlight.
Meanwhile, CEO Jack Dorsey’s message was that the company is still on target to grow its ecosystem. This is a term that works for Apple (NASDAQ:AAPL) so perhaps it will for SQ eventually, but it hasn’t yet.
In reality, after the success of PayPal (NASDAQ:PYPL) earnings, investors expect the same from Square. So this exaggerates the disappointment when the results are not ideal. This is the opposite of what happened with AAPL’s earnings situation. Wednesday’s rip was perhaps bigger as investors sigh of relief that AAPL earnings were not as bad as Alphabet (NASDAQ:GOOGL).
What didn’t help matters for SQ? CFO Amrita Ahuja noted that they will reinvest back into the business. This is code for they will spend a lot of money in order to keep up. Square does face formidable competition from PYPL, Visa (NYSE:V) and MasterCard (NYSE:MA), so they have to spend to compete.
The exciting part about SQ is that it’s the new kid on the block. But as it grows it will come into face to face competitive situation with these behemoths. So this is merely an adjustment period and should not change the overall bullish thesis. Management has been executing on plans well to earn our trust and nothing in this report tells us otherwise yet.
Trading Square Stock
So is this the right time to catch the falling knife? No, but it depends on the time frames of individual investors.
So if I am long the stock I don’t panic out of it. There is support relief below these levels even after the dip. The zone around $65 per share has been pivotal for almost a year. This should act as support on the way down.
Areas of contentions like this are where both bulls and bears agree on value so they fight it out hard. This creates a stall which, in this case, would be support. This is not a hard line in the sand but rather a zone. So even though a big dip of this size usually is not a one-day event, the selling will abate the deeper SQ goes into the pivotal zone. Even if it fails, there is another one just $5 below it.
Furthermore, there still is a bullish pattern in play that suggests that SQ stock is targeting $92 per share and this dip doesn’t yet kill it. As long as the dip doesn’t accelerate the upside scenario is still viable. I do have to admit that this dip severely reduces the odds of it working out this coming quarter.
Square stock is not cheap as it sells at nine times sales. But this is not absolutely nuts as it is in line with say Salesforce.com (NYSE:CRM). Visa and MasterCard actually trade at 16 times sales but they have the benefit of running a huge profit. SQ still is not profitable.
In the long term, Square is likely to get its act together. They operate in a booming area of electronic payments. The whole world is in the middle of a revolution that is determined to migrate all transaction to electronic format. So as long as management stays on task any serious dip is a buying opportunity of Square stock.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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