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Square Won’t Be on Sale This Cheap For Much Longer

Wall Street investor sentiment is on shaky grounds this month and for good reasons. There are a slew of potentially serious but nagging headlines that won’t quit. On one hand, there is political rhetoric threatening of global wars. On t…

Wall Street investor sentiment is on shaky grounds this month and for good reasons. There are a slew of potentially serious but nagging headlines that won’t quit. On one hand, there is political rhetoric threatening of global wars. On the other we have economic jawboning foretelling of an enemy Federal Reserve.

Source: IgorGolovniov / Shutterstock.com

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Either way, great companies like Square (NYSE:SQ) are struggling to find footing. SQ stock has been falling since last summer. It lost $189 per share from the August highs of $289 to its recent lows. Those who chased it too late lost more 60% of their money.

Investors did not make a mistake buying SQ stock. They’ve had the misfortune of bad timing. They picked the wrong levels to enter, but in hindsight there were clues of an interim top. The level near $280 per share had seen resistance twice before. All year the bulls failed to breakout from it. That’s why I prefer to see a breach of resistance before chasing a stock. This is especially important if the bulls are seeking a new all time high.

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Quality Is on Sale

Currently we have the exact opposite situation, mainly because SQ stock has shed so much froth. Buying it now means catching a falling knife into a sharp descending wedge. Doing so with companies that don’t have a strong business is hazardous. Luckily, this isn’t one of them, because management has proven its worth.

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Don’t take my word for it, because you can see it in the financial metrics. The profit and loss statement shows that Square has grown its business leaps and bounds. Revenues last year were 76% larger than 2020, which were 100% larger than 2019. Moreover, they now show half a billion dollars in net income.  Critics will have to dig deep to find fault in those metrics. Ignorant ones might erroneously complain about their price-to-earnings ratio. For a company that grows this fast, having a price-to-sales of 3.62 shows bargain basement pricing.

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I am very confident in my value assessment of Square stock, but I will offer you more. Although I rarely look for direction from Wall Street experts, others do. So, I will use them in my arguments today as backup opinions.

According to Yahoo Finance, half of the SQ analysts want to buy it and the rest want to hold it. However, they all agree that it is far too cheap. Out of 38 price targets (PT), not one is below current price. SQ is now 6% below the lowest PT, and 52% below the average. Clearly, they too agree that the upside opportunity is larger than the downside risk.

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SQ Stock Nitty Gritty

Square (SQ) Stock Chart Showing Upside Potential
Click to EnlargeSource: Charts by TradingView

Now that we nailed down the fundamentals, it is time to roll up the sleeves and peer into charts. Don’t worry, I will keep it simple and straight forward. My opinion is that if the markets hold up, SQ should base soon. The recent lows were 11% away from the Pandemic breakout low. There are two potential hiccups that could foil a big rebound rally.

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First, it’s the candle from Feb. 1 of this year. That’s when the stock left a bearish candle that failed miserably from $128 per share. That was as a sympathetic reaction to the Paypal (NASDAQ:PYPL) earnings release. Secondly, Square will be announcing its own earnings report soon. Those are binary regardless of the quality of the performance. I am confident that the numbers will be impressive, as they are likely to show more growth. What worries me is the human expectation element. The morning after trade is usually more about sentiment than facts. I offer you Robinhood’s (NASDAQ:HOOD) strong rally on a terrible score card.

The bottom line is that Square’s future is secure in the financial technology sector. They will be part of our financial future for a long while. Bearish stints in SQ stock like these will happen, and investors need to take advantage of them. The best results often come from the toughest tests. Things go on sale when others hate them, and therein lies the opportunity today.

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On the date of publication, Nicolas Chahine did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com

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