Square Stock’s Great Year Is Constrained By Tech Peers October Plunge
Square (NYSE:SQ) investors were having a great year… until October came and pared more than a third of their gains. And while SQ stock hovers around 70% higher than it started the year, the recent declines have stock watchers wondering what to do next.
Momentum has defined Square stock in 2018, with the share price that almost tripled through the end of September. Until the stock’s behavior proves otherwise, investors should judge the shares’ short-term behavior based on its current directional movement.
The “Vote” Has Turned Against SQ Stock
SQ stock reminds me of a comment attributed to Warren Buffett’s mentor Benjamin Graham: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
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Just by its performance in 2018, investors have certainly voted heavily for SQ stock over the last year. However, coming into the fourth quarter, its popularity has waned somewhat. ince Oct. 1, the stock has fallen by more than 35%. However, volatility in the shares keeps SQ stock at nearly two times its 52-week low.
The recent drop merely takes Square shares to levels it first seen in early June. And while the decline has also become less dramatic since October, the shares continue to drop.
Despite the declines, I don’t think the multiple will become a factor anytime soon. Even with a personal bias toward valuation metrics, I must concede traditional measures carry less meaning with SQ. At current levels, Square stock is trading at about 135 times consensus 2018 earnings estimates of 45 cents a share.
SQ Stock Remains a Long-term Winner
Most who follow Wall Street should understand the hype. Thanks to Square, the smallest of businesses can now accept credit cards and actively conduct online business transactions. These trends in e-commerce, e-payments, and the economy play heavily in favor of SQ stock. As a result, analysts forecast 70%+ growth for this year. They also believe annual profit growth will exceed 50% for years to come.
I think that growth will keep Square’s multiple well above S&P 500 averages for the foreseeable future and beyond. It also strongly indicates that SQ stock will trade higher five years from now than it does today. I think the long-term future of SQ can be foretold by studying the stock performances of Intuit (NASDAQ:INTU) and Paypal (NASDAQ:PYPL), which were both the Square of their day.
The problem comes in forecasting the short term and managing the possible downside through it. At this point, I see no catalyst that can turn around the swoon in SQ stock. Square trades well ahead of valuation and growth metrics. Its niche in crypto has suffered due to the decline of bitcoin and its peers. Moreover, Apple (NASDAQ:AAPL) continues to become a more formidable competitor as it the Apple Pay footprint.
This, along with the selloff of tech stocks in general, continues to weigh on Square shares. Without the tech-fueled momentum, SQ stock will continue to fall despite the company’s bright future.
Bottom Line on SQ Stock
Momentum will define the short-term destiny of SQ stock for the foreseeable future. Without a doubt, the company’s massive growth has taken Square’s metrics into the stratosphere, with a forward P/E of 82 against the S&P 500 index’s 17.
However, in October the momentum made a dramatic turn to the downside. While volatility has slowed, SQ stock continues its steady drop. Unfortunately for stockholders, no obvious catalyst has appeared to take the momentum upward. Until such inspiration appears, the weighing machine will continue to tip the scales against SQ stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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