Last night Square (NYSE:SQ) management reported earnings and SQ stock investors absolutely did not like what they saw. Not as much as they hated the Box (NYSE:BOX) earnings report but nonetheless, the stock is down more than 4% in early morning trading.
Source: Via Square
Management reported a decent scorecard meeting, beating the metrics on the top and bottom lines. SQ even had strong triple-digit growth in services and subscriptions. But as is the case these days, they guided lower than expected going forward. Wall Street demands to be wowed, or else they punish the stock on earnings events.
And therein lies the opportunity with Square stock.
These dips on earnings that don’t come from bad execution are usually opportunities for those who want to go long the stock. SQ is a momentum stock so it almost never allows for an easy trade. On the way up it always seems too high to chase and on the way down it looks like it is falling into a chasm.
This morning, Square stock is falling into a short-term support zone around $74 per share. But even if this one fails, It will have strong support through $70 per share. In the long run, the $4 differences between levels won’t matter much, especially for a fast mover like this.
How to Trade SQ Stock After Earnings
Year-to-date, SQ stock came into earnings up 40% so it can afford a few red ticks. Furthermore, for the past 12 months, it is up 70%. This is not the case of BOX, where it is losing growth; SQ is still firing on all cylinders.
So while 2019 has been great so far, 2018 ended badly when the whole market crashed into year-end. Since then, SQ stock fell 50% from the September highs but it has recovered half of it back from when the correction started. The slide ended on Christmas and since then it’s up 45% even after this dip.
Those who missed the rally will want back in and it will be a matter of finding the right levels.
Fundamentally, I like the transactor companies like this. The gang includes Visa (NYSE:V), Mastercard (NYSE:MA), American Express (NYSE:AXP) and Paypal (NASDAQ:PYPL). The world is migrating to complete electronic payments and these companies are the ones that will make it happen. SQ is the most expensive of them, but it is also so far the most exciting. So, for now, the valuation won’t matter much to investors as long as it delivers on growth.
Cautious guidance does not mean Square stock deserves a 4% drop. This could be management managing expectations going into a tumultuous geo-political situation where nations are in tariff-war showdowns. Wall Street has a history of over-loving momentum stocks. Much like the situation with Nvidia (NASDAQ:NVDA) for example. At $290, everyone loved it, but when it fell from grace, very few outspoken fans remained.
To that I say that it’s not bad because this is human nature; we even have a term for it: FOMO. Both extremes are wrong, so somewhere in the middle lies the truth. It’s dips like these that bring the hopium back to more reasonable levels.
Surprisingly, a momentum stock that has run up this fast usually sports an overly exuberant ranking among Wall Street experts. But currently, analysts who cover it are split between BUY and HOLD as it trades in the middle of their price range for it. I doubt that given that they beat their targets, there will be a deluge of downgrades. Maybe on the dip some of them will see the opportunity and Square stock may even get a few upgrades.
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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