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Can Square Stock Keep Up Its Growth Momentum?

Tezcan Gecgil

Over the past decade, Square (NYSE:SQ), the financial services and mobile-payments company, has been a fast-growth industry disruptor. From its humble beginnings when it offered a simple way for small vendors to accept credit cards, SQ has now become one of the biggest financial technology (fintech) companies in the world. And the SQ stock price since 2015 has reflected this growth.

Square stock enjoys compelling fundamentals, but technical headwinds remain.

Source: Shutterstock

However, Square stock is off its recent highs, as the shares got penalized following its second-quarter earnings report in August. The current economic and political environment in the U.S. and globally poses plenty of questions for market participants.

And the owners of Square stock may have to reset their growth and share price expectations. If Square’s revenue growth decelerates, then the price of SQ stock will also go down further. In the coming weeks, I’d be a buyer below $60, especially if it approaches $50.

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Here’s what investors should know before buying into SQ stock.

How Square’s Q2 Earnings Came

Square reported earnings on August 1 after market close. Notably, the payment-solutions company posted better-than-expected earnings and revenues.  Its revenue increased 44% year-over-year to $1.17 billion.

And on an adjusted basis, earnings were 21 cents per share, beating Wall Street’s expectation of 17 cents per share.

Square’s subscription and services-based revenue also increased 87% to $251 million. This growth has been driven by its Cash App, Square Capital, and Instant Deposit. Analysts were especially impressed with the Cash App whose quarterly revenue came at $135 million.

The quarterly report once again confirmed that Square stock is a high-growth equity. Such shares in general are far more volatile than market indices or mature companies. Whenever investors feel growth expectations need to be toned down, they sell the stock first and ask questions later.

Investors were especially concerned by the company’s lower-than-expected Q3 guidance. Square management projected higher-than-expected losses on the bottom line. And many shareholders have likely felt that for the rest of the year, SQ stock may face a rising tide.

On earnings day, Square stock closed at $80.98. The next morning, SQ shares gapped down to open at $70.80. Now the shares are hovering around $64.

Square Is Not Yet Profitable

Square was co-founded in February 2009 by Jack Dorsey, who is also the CEO of Twitter (NYSE:TWTR). This innovative financial services company has expanded quickly, with its unique dongles for mobile phones that enable virtually everyone to accept credit-card payments.

The global payments industry is a $100 trillion-plus market. While SQ currently enjoys a head start in serving small businesses, Wall Street has questions about whether it can maintain that growth. If the U.S. economy slows, Square’s growth may start to decelerate rather quickly.

Furthermore, Square is not yet profitable. Its net loss was $7 million in Q2, compared to a net loss of $6 million in the year-ago quarter. The company has reported net losses in five of the last six quarters.

Efforts to attain profitability are taking time. Moreover, not every area Square expands into will necessarily produce easy profits. And unless it increases its revenue, Wall Street may take down the high valuation of SQ stock.

For example, during the earnings release, Square announced the surprising sale of its Caviar foodservice platform to DoorDash. Some believe this exit is premature, considering the evenue potential. On the other hand, others believe that this sale enables Square to leave a low-margin business where competition is fierce.

Square is now able to partner with DoorDash which has a much larger platform. In other words, it can further integrate its payment processing system to other foodservice platforms. Nonetheless, analysts agree that the surprise factor Caviar’s sale has raised eyebrows.

Finally, the expansion of Square’s ecosystem also means that SQ will face increased competition. Square must now compete with many well-capitalized companies, including the global online-payments company PayPal (NASDAQ:PYPL), transaction-processing leader Visa (NYSE:V) and Fiserv (NASDAQ:FISV), which is shaping up to become a global- payments giant.

Technical Charts for SQ Stock Paint a Mixed Picture

Let us briefly remember how the Square stock price has acted over the years.

Following the initial public offering of Square stock in late 2015, its price surged from $9 to an all-time high of $101.15 in October 2018, as the company became a darling of long-term investors.

SQ stock went on a big tear during the summer of 2018, baking in plenty of euphoria. As a result, shares have been weak since reaching its all-time high on Oct. 1, 2018. By late-December 2018, SQ was hovering around $50.

In 2019, although SQ stock is up about 15%, August has not been a good month for shares. That’s of course due to the weak Q3 guidance.

From a technical perspective, I’m not expecting Square stock to make another significant leg up any time soon. In the next few weeks, shares are likely to be rangebound between $60 and $70.

Further, SQ stock has strong support between $60 and $65. However, if any negative headlines flash that affect the technology sector or the fintech sector specifically, then shares may easily go below $60.

Plus, the daily volatility of Square stock is high, giving it a broad trading range, so short-term traders should proceed with caution. Expect SQ to be choppy at best in the near-term.

Square stock will need to stabilize and build a base again before a long-term sustained leg up can occur. Consequently, investors need to be careful about chasing shares at this point.

The Bottom Line on Square Stock

The fintech app revolution is quickly changing the way traditional banks, credit-card issuers and mobile-payments companies work with businesses as well as with their retail customers. Therefore, over the long term, I would not bet against SQ stock. In the short-term, though, stakeholders shouldn’t expect smooth sailing.

At the time of writing, the author did not hold a position in any of the aforementioned securities.

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