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Is the Surge in Square Stock Sustainable?

David Moadel

It’s tempting to jump on the bandwagon when momentum strikes. Multiply that sentiment ten-fold when a respected analyst offers a bullish take. Still, with Square (NYSE:SQ) and SQ stock, I need more than just a single analyst’s seal of approval.

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Moreover, positive coverage isn’t the end-all, be-all. Neither is strong support from retail investors. Although it’s nice to invest with the crowd, sometimes the crowd can lead you in the wrong direction. They also tend to get on board an opportunity late. I believe that’s the case here with Square stock.

Square Stock Making Big Moves, but Going Nowhere

Taking a look back over the past year, SQ stock has had a wide range with a high of $101.15 and a low of $49.82. This is a short-term trader’s paradise but a noisome roller coaster for long-term investors.

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Sure, SQ stock has done well this year, and especially recently. But over the longer-term, shares are still struggling near the middle of the range, essentially back to where it was trading last summer.

An analyst upgrade can do wonders, however. A fresh announcement from Nomura Instinet analyst Dan Dolev confirmed this point. In this case, it was enough to bid the SQ stock price up on heavy volume. In particular, Dolev raised his target price on SQ shares to $100 from $90 on Friday. As justification, he explained that Square’s Cash App has strong momentum.

What’s All the Fuss About?

In addition to the 11% price target increase, Dolev placed a buy rating on Square stock. To justify such optimism, Dolev cited his recent survey of 260 Cash App users. In it, he concluded that the app could provide a “potential boost in sales growth, helped by growing deposit frequency, a price inelastic user base, disruption of the prepaid card industry, and an impressive engagement across Cash App’s plethora of services.”

Furthermore, Dolev reported that Square is the preferred payment app for people who earn $50,000 a year. On a side note, PayPal’s (NASDAQ:PYPL) Venmo is the payment app of choice among people with incomes above $50,000.

One Man, One Opinion

As I mentioned, I don’t believe that one analyst’s opinion is enough to justify buying a stock. And that holds true even if the analyst has done his due diligence. In Dolev’s case, his survey of 260 Square Cash App users represents a small sample size. Moreover, it’s only a snapshot of consumer sentiment at that moment — nothing more, nothing less.

Besides, Dolev is something of an outlier in his extreme optimism. The average price target of SQ stock among 35 analysts that FactSet polled is a much more reasonable $82.66. Bloomberg reports 17 analyst buy recommendations, 16 holds, and four sell ratings on the equity.

Buy, But Not with Both Hands

With shares up 44% year-to-date and outperforming the median 20%-plus in the information technology sector, I’m impressed with SQ stock. However, I’m not impressed enough to recommend anybody load the boat.

If anything, I see SQ stock as an investment to hold. More precisely, I’d adopt a “wait-and-see” approach. Because just as analyst sentiment can juice up momentum, that same enthusiasm can fade in a hurry.

Fundamentally, here’s why I’m cautious: I don’t see PayPal and Vemno yielding any of their considerable market share in the app space anytime soon. Currently Venmo is accepted as a form of payment among two million merchants and is particularly popular with millennials. Of course, this is a coveted demographic with massive aggregate spending power.

The Bottom Line on Square Stock

The inveterate (and perhaps insufferable) contrarian in me can’t bring myself to buy SQ stock right now. However, I wouldn’t oppose taking a small position in Square either. If shares should approach the $60 level, I’ll certainly revisit it. By then, our friend Dan Dolev would have dropped his price target like a hot potato.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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