Should Square Stock Be Bought on Weakness?
Shares of Square (NYSE:SQ) stock were not spared during the latest stock market decline. While Amazon (NASDAQ:AMZN) fell 30% and the PowerShares QQQ ETF (NASDAQ:QQQ) tumbled 16.5%, both performances looked good compared to that of SQ stock. Shares of the payment processing technology company fell about 45% from peak to trough.
The hefty decline of SQ stock surely caused many investors to sell the shares and triggered plenty of emotional distress among those who were long Square stock. Short-sellers of SQ stock were paid handsomely, and they made little effort to hide their glee when they were writing posts on the website of Jack Dorsey’s other company, Twitter (NYSE:TWTR).
The question now becomes: Should investors consider buying SQ stock?
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Up almost 30% from the November lows, SQ may look as though it’s not going to rally much more in the near-term. On the flip side, though, the shares are still about $30 off their highs, making some investors wonder if now is the time to buy Square stock.
Valuing SQ Stock
Valuation has always been SQ stock’s biggest issue. Investors didn’t have meaningful doubts about the company’s products, services, or growth. Offering a great product that creates plenty of value for small- and medium-sized businesses. Square is easy to launch and is convenient for customers. That’s what we call a win-win.
Further, as the economy continues to chug along, strong adoption of Square has enabled the company’s top and bottom lines to grow quickly. Square’s cash flow has been moving in the right direction and management has continually raised the company’s guidance, causing investors to have a continuous buy-the-dip mentality regarding SQ stock.
Of course, it helped that short-sellers continued to short SQ stock based on valuation. As Square stock rose and shorts were squeezed, they needed to cover their positions when their losses got too big, forcing them to become buyers of Square stock.
The bears’ belief about the excessiveness of the valuation of SQ stock was correct. I critiqued the valuation, too (at $97), preferring PayPal (NASDAQ:PYPL) due to its strong growth and lower valuation. But just as it’s difficult to buy a “cheap” stock that keeps getting cheaper, it’s hard to short a growth stock purely based on valuation if it has no negative fundamental catalysts.
Currently, Square stock trades at 156 times this year’s earnings and 100 times analysts’ consensus earnings estimate for 2019. Its revenue multiple is steep, too, as SQ stock trades at roughly 19 times this year’s consensus sales estimates. Its top line is expected to grow 60% this year, but 19 times revenue is still a hefty price to pay.
Comparatively, PYPL stock trades at 36 times this year’s consensus earning estimate and 6.7 times the average 2018 revenue estimate. The company’s revenue is expected to grow 18% this year. So PayPal provides lower growth than SQ, but a more digestible valuation than SQ stock.
Trading Square Stock
So which is better, PayPal or Square? I am long PayPal because of its more attractive valuation after a sharp pullback. I also like PayPal, as well as other payment plays like Visa (NYSE:V), MasterCard (NYSE:MA) and Square because of the robust holiday spending we’ve seen so far this year.
I don’t dislike SQ, but when a growth stock breaks down, there’s no telling how low it can go, as you can see from the chart above. After SQ stock fell sharply from its October highs, it’s facing a great deal of resistance.
SQ has resistance a few percentage points above its current levels. That resistance is depicted by the purple downtrend resistance line. The next resistance point for Square stock is $77, which is the point at which its 50-day and 100-day moving averages converge. If SQ stock exceeds these two points, SQ will likely pick up some momentum.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN, PYPL and V.
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