Square Stock Up 16% in 2021 – Time to Buy SQ Stock?

The price of Square stock has advanced nearly 16% in 2021 on the back of a strong performance of its business and multiple important announcements including the acquisition of the Australian buy now, pay later financial technology firm AfterPay.

Now, the company is getting ready to report its financial results covering the third quarter of the 2021 fiscal year after the market closes today and all eyes will be on how Square is recovering from the pandemic-prompted headwind that caused a drop in the transaction-based revenues of its Seller ecosystem.

What can be expected from Square stock as we enter the fourth quarter of the year? In this article, we review the latest price action for the stock along with taking a look at Square’s fundamentals to outline plausible scenarios for the future.

68% of all retail investor accounts lose money when trading CFDs with this provider.

Square Stock – Technical Analysis

Square (SQ) stock has remained in consolidation mode so far this year as highlighted by the range-bound price action shown in the chart above.

This consolidation is not at all unexpected considering the strong run-up that it experienced back in 2020 as the price advanced nearly 250% on the back of positive pandemic trends.

The fast growth of the firm’s Cash App and expectations about the recovery of the Seller ecosystem’s performance primarily fueled this positive performance last year. However, with the valuation of the company now jumping to nearly 18.5 times of its sales for the last twelve months (ex. Bitcoin dealings) it is understandable that market participants are taking a pause before deciding what’s next.

This stalled momentum is reflected by the price drifting above and below the stock’s short-term moving averages. However, the most important support and resistance levels to watch would be the upper and lower bounds of the rectangle, which stand at around $280 and $190 per share.

This consolidation is also leading to the formation of what could be a bull flag – a typically bullish pattern that could indicate the continuation of the 2020 uptrend as long as the company lives up to the market’s expectations.

A break above this $280 resistance will validate this pattern and may lead to a sizable uptrend for Square. However, a break below the $190 level may result in a sharp decline in the mid-term.

It is also important to note that the 200-day simple moving average has acted as support for the price of Square stock lately and the price action is awfully close to that mark. With this in mind, a disappointing quarterly result may end up catalyzing a sharp drop toward the lower bound of the rectangle.

All things considered, both upside and downside risks are high and investors should be prepared for a volatile post-earnings period for Square. The premium for short-dated call and put options for Square seem to be pricing for a 5% fluctuation in the price following the release of these results.

Square Stock – Fundamental Analysis

Square’s revenue-generation capacity has been distorted by the inclusion of its Bitcoin sales. Therefore, for the purpose of assessing the value of the firm, it is easier to focus on its operating and bottom-line performance.

In the past twelve months, the firm has generated revenues of $6.3 billion excluding its BTC dealings while its profit margins stood at nearly 59% following that same adjustment. The contribution of this BTC operation to the firm’s gross margin is negligible which is why it doesn’t even deserve to be included to estimate the company’s fair value.

Net operating income during this same period landed at $287 million while net earnings stood at $573 million as a result of the positive performance of Square’s equity stake in DoorDash. Meanwhile, the company’s adjusted EBITDA landed at $962 million.

If we use the firm’s adjusted EBITDA for the purpose of establishing a fair value for Square, the TTM figure provided above results in an EV/EBITDA multiple of 122. This is a fairly stretched metric and one that reflects that most of the company’s future growth is already being priced in.

With this in mind, downside risks for Square seem particularly elevated as the company is being “priced to perfection”. Any setbacks concerning the firm’s AfterPay deal or indications that growth for any of its ecosystems is stalling – either in this quarter or in the following ones – may lead to a sharp correction in the stock price as analysts will probably revisit their models and adjust accordingly.

Many companies have already experienced this kind of post-pandemic downtrend but Square has somehow managed to stay off that list thus far. It is my view that, at some point down the line, the price will face a tough correction.

Buy SQ Stock at eToro with 0% Commission Now!