Last year the impression was that banks couldn’t hold their rallies, so it was easy to short the financial centers. But that was not the case for the payment transactors like Square (NASDAQ:SQ). The perception is that these financial tech –FinTech — companies are more tech than financials, so their stocks were soaring. But SQ stock has recently hit a snag and it lags the group.
Source: Via Square
Year-to-date, SQ stock is still outperforming the S&P 500, up 16%, but that’s about half as much Mastercard (NYSE:MA) and Paypal (NASDAQ:PYPL) and about eight percentage points worse than American Express (NYSE:AXP) and Visa (NYSE:V).
For the last three months it’s even worse. SQ is down 21% when the rest are still up for the same period.
So, is this relative slack in Square stock’s performance an opportunity to bet on the bounce? Or is it a leading indicator that the rest of the gang will revert lower? My bet is that the fintech sector is still a bullish bet and that any weakness in Square is an opportunity to buy. For the last two years, SQ stock is up 184% which is more than double its competition.
SQ Stock and the Market
It is important to note that the whole equity market is being held hostage by the crisis of sentiment that we are having due to the tariff war. Keep that in mind for all bullish write ups inside that context.
First, let’s examine the whole fintech sector and why it’s a definite winner for the long term. The globe has committed to moving as many financial transactions as possible online, and companies like Square are already there. This is a trend that is not likely to reverse, so demand on their products and services is likely to stay strong for decades. There are smaller companies coming into the arena, but I bet the ones already there will have the advantage.
Fundamentally, SQ stock is still relatively new, so it’s the most expensive of the bunch. Wall Street gives it the higher valuation because in theory it delivers the most growth. So far, management has not faltered, so this credit should continue until they show that growth is abating.
In their last earnings report, SQ beat the metrics but were cautious with their guidance. So the message is that they continue to successfully execute on plans. Don’t panic because of the muted guidance — this is management padding their expectations. Eventually this, too, shall pass and the stock should play catch-up with the rest.
SQ stock sells at 8x sales. So although it loses money, it’s twice as cheap as Visa and MA, both of which sell at over 16x price to sales. So after a big stock dip like this, I can consider it a value trade here. A lot of the froth has already fallen off.
But the best argument for a Square rally scenario from here is technical.
The weekly chart shows that SQ stock just bounced off an important support zone. The area around $60 per share has been pivotal for over a year. Bulls and bears are willing to fight over it, which in turn creates congestion. On the way down, this translates into support.
Moreover, Square stock still maintains a higher low trend off the Christmas bounce. This is also bumping against the descending line of lower highs, so now it comes into a tight point. Usually, these explode in a big move, and after so much of the froth has already left the stock, I bet odds are it surges higher.
If so, the immediate target would be the April and February fail points at $75.50 and $82 per share, respectively.
Conversely, stocks are still hostage to geopolitical headline risk, so overall sentiment is sour. Square stock rallies would probably need the help of overall market action. So if the general malaise persists on Wall Street, then SQ is vulnerable.
Below $61 per share, it could trigger a retest of the December lows near $51. I don’t see this happening, but the technical bearish pattern looms and the neckline is close. So if this is a short-term trade then I have to set tight stop loss triggers. Else, I can hold Square stock for the long term as it will be a winner.
In short, Square stock has solid fundamentals in a popular sector. And now also has favorable technical setups. This makes it an attractive bullish bet for the next few weeks.
The experts on Wall Street are split on the rating between buy and hold, but they all agree that its stock should be higher. It’s trading now well below their average price target near $83.
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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