Square's Stock May Jump Following Its Results
Summary
- Square is due to report results on Feb. 27.
- The chart shows that the stock may break out and rise to $83.
- The options are suggesting the stock rises 11% following the results.
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Square's (NYSE:SQ) stock may be getting ready to leap higher in the coming weeks, based on the technical charts and an analysis of the options market. The stock has consolidated since the end of January in a range between $68 and $75. Now the chart suggests the shares could surge by 10% over the coming weeks.
The biggest drawback to Square is its valuation trading at nearly 70 times 2020 earnings estimates of $1.08 per share. That is much higher than many of the payment processors stocks, such as PayPal (PYPL).
Results Will Have a Big Impact
The company is set to report results on Feb. 27. Consensus analysts’ estimates are for earnings to have increased 68% in the fourth quarter to $0.13 per share on revenue growth of 61% to $453.9 million.
Bullish Chart
Square's chart shows that the stock is forming an ascending triangle, a bullish continuation pattern. It suggests that the stock breaks out, rising above technical resistance at $78. If that happens the shares could go on to rise to around $83, its next level of resistance.
Additionally, the relative strength index has been trending higher, and that would suggest that bullish momentum is entering the stock. Also, volume levels have started to decline as the stock has been rising. It would indicate that the number of sellers in the equity is likely diminishing.
If the stock can climb above resistance at $83, it could open the door for an increase to $91.75.
Bullish Bets
An analysis of the options suggests that Square’s stock could rise or fall by 11% from the $75 calls due to expire on March 15, using the long straddle strategy. It places the stock in a trading range between $66.75 and $83.75 by that date. The number of calls at the $75 strike price outweighs the puts by nearly 2 to 1, with about 20,000 open call contracts. It indicates the bets are for the stock to rise.
Additionally, there are more than 21,000 open call contracts open at the $80 strike price. Those calls have gradually seen their open interest levels nearly double since the end of January. A buyer of the $80 calls would need the stock to rise to $82.25 to earn a profit.
Valuation Is High
The one problem with Square is its valuation at 70 times 2020 earnings estimates. That is much higher than peers such as PayPal at 27.5 times 2020 estimates, Visa (V) at 23.7, and Mastercard (MA) at 25.
Even when adjusting Square’s valuation for its earnings growth it's tough to justify the current valuation. The PEG ratio for 2020, based on its expected earnings growth of 53%, for the stock, is 1.3. That places the stock on the upper end of a reasonably valued stock.
A Rising Stock but With Risks
Momentum is bullish for the stock, and the options bets would seem to suggest that traders are looking for shares to jump in the days following results. However, volatility is expected to be high following the results, and the valuation is not cheap. It just means that the company is going to not only have to beat results but deliver a robust outlook for the shares to keep rising.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I am/we are long V, MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.