Square Stock Down 7% in December – Time to Buy SQ Stock?

Square stock is down nearly 7% so far in December following the release of the firm’s Q3 2021 earnings report, a rebrand of its business, and the unexpected delay of Afterpay’s decision to approve its proposed takeover.

On 4 November, the company headed by the former Chief Executive of Twitter (TWTR), Jack Dorsey, reported its financial results covering the third quarter of 2021. Revenues for the three months ended on 30 September landed at $3.84 billion and missed analysts’ estimates by a long shot amid weaker-than-expected Bitcoin transaction volumes.

Meanwhile, earnings per share came in line with Wall Street’s estimates but that was not enough to make investors happy as reflected by the 4% drop SQ stock experienced after the report was released.

Just yesterday, the business was rebranded and will be now known as Block. This name reflects a pivot toward blockchain technology and cryptocurrencies as part of Dorsey’s devotion for what this industry stands for and its potential to change the way the world works.

“The name has many associated meanings for the company — building blocks, neighborhood blocks and their local businesses, communities coming together at block parties full of music, a blockchain, a section of code, and obstacles to overcome” the firm stated in a press release.

Yesterday’s decline in Square stock could have also been prompted by a decision from the Board of Directors of Afterpay to delay the approval of the company’s takeover. According to the firm, the decision will be postponed until next year as both companies are awaiting the approval of the transaction by the Bank of Spain. A decision from the central bank is expected to be issued by mid-January 2022.

It is unclear which of the two announcements prompted such a pronounced decline in the share price of the payment processing company but it is important to note that tech stocks as a whole experienced a drop as reflected by the tech-heavy Nasdaq 100 stock index, which settled 1.6% lower by the end of the day.

What can be expected from Square stock as we are only a few days away from the end of the 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

Back in November when I last wrote about Square, I highlighted the presence of a consolidation rectangle that, alongside the strong uptrend that the stock experienced during the pandemic, formed what could be considered a potential bull flag continuation pattern.

This pattern remains in play as the price has not yet broken below the lower bound of the rectangle but the latest weakness in the stock price is increasing the odds that such a break can occur.

At the moment, SQ stock has broken below its short-term and long-term moving averages and these markers have posted a death cross – a setup that typically signals an upcoming downtrend in the price of a financial asset.

Meanwhile, momentum indicators are quite bearish with the Relative Strength Index (RSI) declining to its lowest level since the pandemic crash of February-March 2020 while the MACD is posting its lowest reading since May this year.

Yesterday’s trading volumes exceeded the 10-day average by more than 1.5 times and this, along with the fact that the stock settled at the session’s lows, indicates that buying interest was quite scarce.

All things considered, Square investors seem to be rushing through the doors to get rid of their holdings and all technical readings point to the possibility of further declines in the stock price.

If the price breaks below the $190 support area, chances at the SQ stock could be heading to the low 150s resulting in a total downside risk of around 20%.

Square Stock – Fundamental Analysis

During the first nine months of 2021, Square brought total revenues of $13.6 billion and $5.6 billion excluding Bitcoin dealings. BTC-related revenues can be excluded from the analysis as they only generate a tiny fraction of the company’s gross profits – around 5%.

Meanwhile, the firm’s adjusted EBITDA nearly tripled during that same period, moving from $288.6 million to $830 million while its adjusted diluted earnings per share stood at $1.44 or nearly three times higher than the figure reported a year ago.

Using a simple run-rate of these numbers to estimate the firm’s valuation multiples at the moment we get the following:

P/S ratio: 12x (ex. Bitcoin dealings)

P/E ratio: 101x

EV/EBITDA: 82x

Even though these multiples seem quite stretched, it is important to note that Square’s top and bottom-line results have been growing at a fast pace in the past few years and its profit margins have been improving as well.

With this in mind, Square stock cannot be flagged as overvalued just based on these metrics as its net earnings and EBITDA have been growing rapidly. Therefore, if the price of Square stock declines significantly in the following weeks as a result of the technical weaknesses highlighted earlier in the article, this drop could be an opportunity for long-term investors to open a position in a company with a positive track record and promising prospects.

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