Square stock has had an impressive year
Fintech investors who also want Bitcoin exposure tend to view SQ stocks as a proxy
Despite the optimistic long-term outlook, investors should be ready for short-term volatility, with a possible drop towards $260 in the coming weeks
Investors in financial technology stocks Square (NYSE:) have seen robust returns so far in 2021. SQ shares, which are up more than 23% this year, hit a record high of $289.23 on Aug. 5. Since then, however, equities have come under pressure. They closed just over $267 yesterday.
The 52-week range was $134.00-$289.23, and the company's market cap is $124 billion.
Based in San Francisco, Square is known for its ecosystem of payment services for merchants and the Cash app for individual users who can trade and store through the app.
Since October 2020, the company also buys Bitcoin at various intervals. Therefore, it has Bitcoin on its balance sheet, both as an asset and an income segment. As a result, movements in cryptocurrencies, especially in Bitcoin, typically affect the price of SQ stocks, at least in the short term.
For example PayPal (NASDAQ:) recently announced that its UK-based customers will soon be able to trade and store a number of digital currencies on the platform. The news headline saw both PYPL and SQ stocks rise.
Highlight recent statistics:
“The cryptocurrency market size is expected to grow from US$1.6 billion in 2021 to US$2.2 billion in 2026, at a CAGR of 7.1%.”
Investors are therefore delighted that companies such as Square and PayPal can benefit from this growth.
Square recently released robust . Total revenue was $4.68 billion, up 143% year over year. Excluding Bitcoin, second-quarter revenue was $1.96 billion, an 87% year-over-year increase. Bitcoin revenue was $2.72 billion.
Adjusted profit came in at 66 cents, an increase of 266.7%. The company ended the quarter with $4.6 billion in cash. Wall Street was pleased with the growth in transaction, subscription and hardware revenues.
In a shareholder letter, management said:
"We delivered strong growth at scale in the second quarter of 2021. Gross profit grew 91% year over year to $1.14 billion, which was 57% based on a compound annual growth rate (CAGR) of two years."
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In April, Square acquired a majority stake in TIDAL, a global music and entertainment platform. It recently announced that it will buy Australian "buy now, pay later" group Afterpay (ASX:). has an 'outperform' rating. The stock has a 12-month price target of $302.20, which represents a return of approximately 13% from current levels.
Square consensus estimates.
Source: Investing.com
The stock's lagging P/E, P/S and P/B ratios are at 263.6, 7.8 and 46, respectively. This means that the valuation level even for a fintech giant if Square is too high. In comparison, PayPal's trailing P/E, P/S, and P/B ratios are 68.26, 13.77, and 15.71.
Investors looking at technical charts may be interested in knowing that the recent decline in SQ stocks could potentially continue and soar towards the $250 level. In that case, we expect the stock to build a base between $240 and $260 for several weeks before another up-leg begins.
We should also note that the beta (?) of SQ is 2.13, a measure of the volatility of a security relative to the overall market.
For a company where ? is greater than 1, this means that it is more volatile than the market. With a beta of 2.13, SQ stocks are likely to be at least twice as volatile as the overall market. In other words, we should expect stock price fluctuations, especially in the short term.
Our first expectation for the stock is a possible pullback towards $260, or even lower. In the event of such a decline, long-term investors would find a better value.
3 Possible trades
1. Buy SQ stocks at current levels
Investors who are not concerned with daily price movements and who believe in the company's long-term potential should consider investing in Square now.
Yesterday SQ closed at $267.57. Buy-and-hold investors should expect to maintain this long position for several months as the stock may attempt to hit the all-time high of $289.23 or even higher, possibly above $300.
Assuming an investor enters this trade at the current price and then exits around $290, the return would be about 8.5%. However, investors concerned about large declines may also want to consider placing a stop-loss that is about 3-5% below their entry point.
2. Bear Put Spread
Readers who believe that some more profit could be taken in SQ stocks in the near term may want to consider embarking on a bear put spread strategy.
It may also be appropriate for these long-term investors to use this strategy in conjunction with their long stock option. The setup would offer some short-term protection against a price drop in the coming weeks.
This trade requires a trader to have one long Square put with a higher strike price and one short SQ put with a lower strike price. Both puts have the same expiration date.
Such a bear put spread would be established for a net debit (or net expense). It will benefit if Square's stock falls in price.
For example, the trader can buy an out-of-the-money (OTM) put option, such as the SQ Dec.17 260 strike put option. This option is currently offered for $21.70. So it would cost the trader $2,170 to own this put option, which expires in just under four months.
At the same time, the trader would sell another put option with a lower strike, such as the SQ Dec.15 240 strike put option. This option is currently offered for $13.55. Thus, the trader would receive $1,355 to sell this put option, which also expires in just under two months.
The maximum risk of this trade would be equal to the cost of the put spread (plus commissions). In our example, the maximum loss would be ($21.70-13.55) X 100 = $815 (plus commissions).
This maximum loss of $815 can be realized if the position is held until expiration and both SQ puts expire worthless. Both puts will expire worthless if the price of Square's stock at maturity is above the strike price of the long put (higher strike price), which is currently $260.
The potential profit from this trade is limited to the difference between the strike prices (ie ($260.00-$240.00) X 100) minus the net cost of the spread (ie $815) plus commissions.
In our example, the difference between the strike prices is $2,000. Therefore, the earning potential is $2,000-$815 = $1,185.
This trade would actually break at $251.85 at maturity (excluding brokerage commissions).
3. Buy a top square ETF
Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that may be suitable for buy-and-hold investors. Readers who don't want to invest capital in SQ stocks but still want significant exposure to the stock may want to consider buying a fund that keeps the company as its leading name.
Examples of these ETFs include:
Simplify Volt Fintech Disruption ETF (NYSE:): The fund is down 6.9% YTD, and the weight of SQ stocks ' is 17.14% (we covered two other similar ETFs from this issuer;
ARK Fintech Innovation ETF (NYSE:): The fund is up 34.4% YTD and the weight of SQ stocks is 10.87% (discussed here);
VanEck Vectors® Digital Transformation ETF (NASDAQ:): This new fund is down approximately 15.5% since its inception in April 2020, and its SQ stock weight is 9. 82% (described here).
Bottom Line
Since its IPO in 2015, Square Stock has become a top performer. We expect equities to hit new highs in the coming quarters.
However, some higher profits could be made in the short term, giving buy-and-hold investors a better entry point.
