Here’s Why Square (SQ) Should be on Your Buy List

Payment solutions provider Square (NYSE: SQ) shares took a heavy bearing during the coronavirus pandemic sinking to lows of $32.33 on March 18, 2020. This move was positively correlated to the S&P 500 (NYSEARCA: SPY) which collapsed over 35 percent in just under a month. Prior to this black swan event Square hit yearly highs at the $87.25 Fibonacci (fib) level on Feb. 20, 2020. The rally off recent lows have been shuddered at the weekly 5-period moving average (MA) on the nose at $54.93, which sets up potential pullbacks for opportunistic entries for both long-term investors and nimble traders.

Square Q4 2019 Earnings Highlights

On Feb. 26, 2020, Square reported Q4 2019 earnings at $0.23-earnings per share (EPS) beating consensus estimates by $0.02 coming. Net revenues grew 41-percent year-over-year (YoY) to $1.31 billion and gross profits grew 39-percent YoY to $527 million. Adjusted EBITDA grew 46-percent YoY at $119 million. Square guided FY 2020 below consensus at $0.90-$0.93-EPS versus $0.95-EPS consensus analyst estimates and revenue projected at $5.90-$5.96 billion. Shares rallied despite the lowered guidance due to the impressive materialization of the Cash App which is transforming into its own ecosystem.

The Cash App Ecosystem Transformation

Square’s Cash App is a peer-to-peer transfer network similar to PayPal (NASDAQ: PYPL) Venmo App that continues to expand its ecosystem of products and services. This top 15 app continues to exhibit strong growth with 29 million monthly active users (MAUs) as of December 2019, up 80-percent YoY from 15 million. The Cash App net revenues grew 147-percent YoY to $361 million generating an average of $30 per MAU, up double from December 2017. Square is levering the Cash App’s network effect as a gateway portal to their other complementary products and services including its Bitcoin trading platform, the Cash Card (used by 20-percent of MAUs), Boost (cashback and loyalty rewards program) and Investing (zero-commission stock trading platform including fractional shares). Think Venmo + Robinhood + Stockpile + Coinbase wrapped up and monetized in a single app.

Square Financial Services Rollout 2021

On March 18, 2020, the Federal Deposit Insurance Corporation (FDIC) approved Square’s Industrial Loan bank charter as well as receiving bank charter approval from the Utah Department of Financial Institutions. Square Financial Services will launch in 2021 as an independent bank subsidiary of Square. The primary business will be providing small business loans for Square Capital’s commercial lending business and offering deposit products. Similar to PayPal Credit and PayPal Working Capital, but instead of using a third-party bank like Web Bank, Square would own the bank and seek to offset balance sheet exposure by selling loans to third-party investors.

Square Getting Ahead of COVID-19

On March 24, 2020, Square proactively revised down Q1 2020 guidance cutting revenue forecasts to a range of $1.30 billion-$1.34 billion compared to previous forecasts of $1.34 billion to $1.36 billion. The company expects the Cash App to be less impacted and withdrew FY 2020 guidance amid uncertainty. They noted January and February saw 32-percent YoY Seller gross profit and Cash App gross profit grew 118-percent YoY. Stepping in front of the coronavirus pandemic helped boost confidence with investors as shares power rallied 40-percent off March 18^th lows. While there is no question the company will take a hit during the COVID-19 lockdown period, the Cash App infrastructure continues to galvanize itself during times of global disruption due to the frictionless nature of the product and the seamless network effect it fosters.    

Opportunistic Buy Levels

Using the rifle charts on wider time frames to lay out the playing field suitable for swing traders and investors. SQ stock bounced from a low of $32.33 on March 18^th  to peak out at $59.25 just six trading days later. The daily chart made a market structure low (MSL) trigger above $47.42 as the stochastic formed a mini pup coil through the 20-band. With the weekly stochastic still in downward oscillation, the 5-period MA resistance at $54.93 deflected attempts to break. This sets up a battle of mini pups with the weekly bearish stochastic mini inverse pup under the 5-period MA at $54.93 versus the daily bullish mini pup above the daily 5-period MA at $53.83. Usually, the smaller time frame takes the first stab while the wider time frame deflects until the smaller time frame concedes in the direction of the wider time frame. With this in mind, SQ should present solid pullback opportunities for longs. There are three pullback entry levels to consider for scaling or scalping. These are $47.42 MSL trigger/sticky 2.50s price zone, $40.81 super fib and $37.28 fib/weekly lower BBs. Traders should consider wiggle room of up to $0.75 and long-term holders should consider implementing a pyramid scaling allocation model for opportunistic average pricing.