Square Priced For Perfection As Second Quarter Draws To A Close
Square Inc. (SQ) missed Q1 2020 profit estimates by a wide margin in May, losing $0.02 per-share, much worse than expectations for a $0.13 per-share profit. However, inline revenues of $1.38 billion marked a substantial 44% year-over-year increase, triggering a buy-the-news reaction, underpinned by executives insisting that business had picked up substantially in April, following the first quarter’s pandemic-driven shutdowns.
This e-commerce provider faces a highly cyclical business environment, with revenues dependent upon merchant activity in the United States, Canada, United Kingdom, and Australia. Visa and MasterCard reported that digital transactions dropped precipitously in the first quarter, due to the pandemic. While reopening is now underway, it’s hitting roadblocks due to a runaway epidemic in the U.S. that could further impact business activity. Even so, it’s nearly impossible to accurately forecast transaction levels between now and year’s end, due to massive uncertainty.
Bullish Square View
Credit Suisse analyst Timothy Chiodo illustrated the bullish view on Square in May, noting that “Cash App downloads, a proxy for user growth, continued to improve through May 18th, averaging >1 million downloads per week, +10% vs. April levels, giving May potential to be the 3rd consecutive month of record net new transacting active user additions”. However, the stock has now exceeded his $80 target by 30%, raising odds for a negative valuation call.
Wall Street And Technical Outlook
Wall Street consensus has deteriorated in the second quarter, with 9 ‘Buy’, 11 ‘Hold’, and 4 ‘Sell’ recommendations failing to stem a momentum bid that’s lifted the stock to an all-time high. Price targets currently range from $49 to $125, with price now situated halfway between the median $83 target and street high. That leaves little room for error due to an astronomical 157.0 price-to-earnings ratio that greatly increases risk for new shareholders.
Square broke out above the October 2018 high at 101 in mid-June but has added just three points, raising doubts about long-term buying power. In addition, the channeled advance off the March low carved no consolidations or pullbacks, meaning it will take little selling pressure to trigger a failed breakout that reinforces resistance at the psychological 100 level. The company may then need to blow away second quarter estimates to win back departing shareholders.