Square Stock Down 20% in December – Time to Buy SQ Stock?

The price of Square stock has declined 20% so far this month following the post-earnings weakness that it experienced back in November in combination with the negative momentum that growth stocks as a whole have seen as well.

The market’s risk-off attitude in the past few weeks has been a major factor weighing on the value of Square – recently renamed as Block – as market participants continue to digest the recent announcements of the Federal Reserve concerning its monetary policy.

The highly accommodative stand assumed by the central bank at the onset of the pandemic helped stretch the valuation of companies with relatively weak fundamentals in the past year.

However, an upcoming tapering of the Fed’s asset purchase program and the introduction of multiple interest rate hikes in 2022 amid an acceleration in inflation rates are contributing to depress valuation multiples across the board – especially for companies like Square.

Meanwhile, some downbeat comments from Square’s Chief Financial Officer in regards to the performance of the company’s CashApp may have contributed to this latest decline.

The senior executive told investors during a conference call held earlier this month that this segment of the business was experiencing more moderate sequential growth rates in November compared to the management’s forecasted figures.

What could be expected from this tech stock as we are heading to the beginning of a new year? In this article, I’ll be assessing the price action and fundamentals of SQ stock to outline plausible scenarios for the future.

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Square Stock – Technical Analysis

In my latest article about Square stock, I highlighted that a break below the $190 support area could result in a significant decline with a plausible target set at the low 150s if such an event occurred.

Thus far, Square has shed 12% since that break took place and, as a result, the bull flag pattern that was previously in play seems to have been invalidated.

Momentum indicators for Square are heavily depressed as the Relative Strength Index (RSI) has posted its worst reading since the February-March 2020 pandemic crash while the MACD is also declining to its lowest level in years.

This highlights the strength of the negative momentum that the stock is experiencing following the release of the company’s Q3 2021 earnings report and other developments including the management’s decision to rename the firm as “Block” and some unexpected delays in the approval of the acquisition of AfterPay.

Moving forward, the downtrend has not yet shown signs of decelerating. Therefore, if the decline continues in the following days, the low 150s remain the next support to watch for a total downside risk of 10% based on last Friday’s closing price.

Square Stock – Fundamental Analysis

Square’s valuation remains heavily stretched despite the latest decline that it had experienced and that creates room for further negative volatility down the road.

Based on the firm’s current market cap of $77 billion, Square’s valuation metrics would now be:

P/S Ratio: 10x (ex. Bitcoin dealings).

P/E Ratio: 87x

EV/EBITDA: 70.5x

These metrics now seem more acceptable for a company that has been growing at the pace Square has.

That said, it is important to note that the acquisition of AfterPay will result in a large number of shares being issued amid the deal’s elevated $29 billion price tag.

Some, if not all, of that post-transaction dilution seems to have already been priced into the stock as SQ stock has gone down 32% since the deal was announced.

With this in mind, it would be plausible to expect some near-term bottom as momentum oscillators have reached the kind of levels that justify a short-term technical rebound while, from a fundamental perspective, the valuation may have already priced the expansion of the share count that will result from AfterPay’s acquisition.

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