Square Stock: Sell-Off Offers a Better Entry Point for this Long-Term Mobile Payments Play

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Square Stock Selling Opens Up Opportunities

As I’m writing this, the Dow Jones is down 375 points following the 831-point loss on October 10. Technology stocks have been taking a beating, with the Nasdaq down nearly nine percent from its recent high, including a massive 7.9% drop in October.

The selling action reminds me a bit of what happened in early February, when stocks got slaughtered.

Having gone through several major bear markets, I can safely say the world is not coming to an abrupt end, but there will likely be heightened volatility as the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) jumps.

My view is that the technology sector was vulnerable to selling after the record moves, and it now provides aggressive traders an opportunity at lower prices.

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That’s the situation with mobile payment technologies company Square Inc (NYSE:SQ). With a beta of 4.4, it is more vulnerable to selling. SQ stock has corrected 31% from its October 1 high.

Yet, despite the current selling, Square stock is still more than double from its 52-week low of $31.44, and is easily outperforming the Nasdaq.

It could retrench further to the next levels of support at around $55.00 to $60.00, but any major dip should be looked at as an opportunity.

For the uptrend to remain valid, the stock will need to hold the trendline support around $60.00.

Chart courtesy of StockCharts.com

Investors selling Square stock could be concerned after the departure of CFO Sarah Friar, who was an integral part of the company, helping CEO Jack Dorsey with operations.

The reality is that Square Inc should continue to thrive in the booming global mobile payment solutions space, as evident by its rapid growth and strong projections.

My Bull Case for Battered-Down SQ Stock

A look at the revenue picture shows a beautiful uptrend, with four consecutive years of growth and revenue quadrupling from 2013 to 2017.

Fiscal Year Revenue (Millions) Growth
2013 $552.4
2014 $850.2 53.9%
2015 $1,270 49.0%
2016 $1,710 34.9%
2017 $2,210 29.6%

(Source: “Annual Financials for Square Inc,” MarketWatch, last accessed October 12, 2018.)

Along the way, Square Inc has narrowed its earnings before interest, taxes, depreciation, and amortization (EBITDA) loss with a positive $50.1 million in 2017, up 161.5% year-over-year.

Fiscal Year EBITDA (Millions) Growth
2013 -$78.71
2014 -$107.3 -36.4%
2015 -$92.2 14.1%
2016 -$81.5 11.7%
2017 $50.1 161.5%

(Source: Ibid.)

The uptick in EBITDA helped Square Inc post an adjusted $0.27 per diluted share in profits in 2016.

For 2018, Square is estimated to report an adjusted $0.45 per diluted share, followed by as much as $0.96 per diluted share in 2019. (Source: “Square, Inc. (SQ),” Yahoo! Finance, last accessed October 12, 2018.)

Square Inc. managed a positive free cash flow (FCF) of $101.6 million in 2017, its first positive FCF. The company’s improving profitability will help drive FCF higher .

Fiscal Year Free Cash Flow (Millions) Growth
2013 -$108.5
2014 -$138.2 -27.4%
2015 -$9.9 92.9%
2016 -$2.3 76.6%
2017 $101.6 4,514%

(Source: MarketWatch, op cit.)

Analyst Take

Jack Dorsey has done a great job at making Square Inc’s technology relevant by riding the demand for mobile payment solutions.

SQ stock is not cheap by any standard, but the company’s insiders are buying to the tune of a net 2.1 million shares during the past six months. (Source: Yahoo! Finance, op cit.)

So, while Square stock could retrench lower given the current market conditions, I’m confident that it will eventually retrace to its highs.