Square Stock’s Potential Justifies Risk of Buying Before Earnings

Square (NYSE:) stock appears stuck. The equity lost more than half of its value in last year’s sell-off in tech stocks. Overall, it has risen about 20% since hitting a low in December. However, that came after the second-quarter earnings report led to a two-day drop of around 20%.

Source: Jonathan Weiss /

Since that quarterly update in August, SQ stock has seen little movement. The long-term future of SQ remains promising. However, traders will soon face the first earnings report since light guidance from the second-quarter news sent Square stock reeling. Now traders must decide whether to buy or wait.

Square Stock Remains a Long-Term Buy

At the beginning of October, I stated that SQ stock lacked either a direction or a catalyst at current levels. Today, SQ trades at approximately the same price level. The one thing that has changed is that the 50-day moving average has fallen below the $61.50 per share range. This is slightly below the current price of Square stock, just over $62 per share as of the time of this writing.

Long-term, I could not love this stock more. I say that because Square has become more than a payments company such as PayPal (NASDAQ:). As most know, it started as a service to facilitate smartphone credit card payments. Now, with its numerous apps, investors should think of Square as the Apple (NASDAQ:) iOS or Android of payments. Square Capital, Square Payroll, and Square Register are other examples of their apps. Though Square faces peers in all of these areas, none have built a comparable ecosystem.

Moreover, as Will Ashworth points out, the ecosystem has made huge strides through the . In addition to its cash and crypto transfer services, the Cash App now allows for free stock transactions. It’s little wonder it had its best month in July. In that month, it added 2.4 million users, rising to a total of 59.8 million downloads since the service began.

SQ Still Faces Short-Term Uncertainty

The question for traders is when this will again help SQ stock grow? With a forward price-to-earnings (PE) ratio of almost 56, Square stock prices much of that growth in already. SQ remains a story of long-term potential amid short-term struggles.

However, traders could get a clue when the company releases third-quarter earnings on Nov. 6. Analysts forecast non-GAAP earnings of 20 cents per share on revenues of $596.51 million. Investors should note that represents a 53.8% profit increase from year-ago levels. They also should remember that SQ stock usually beats earnings estimates. Given these fundamentals, I recommend taking at least a partial position in SQ before earnings.

Investors should note the headwinds. Many fear a recession. After more than ten years of growth and an ongoing trade war with China, I consider that a valid concern. That especially holds true as SQ stock depends on the small and medium-sized enterprises that would bear the brunt of a downturn.

However, I think at worst, that would retest the 52-week low, currently $49.82 per share. Still, I see the upside as much higher. The company only operates in five industrialized countries. This only scratches the surface of where they can (and I think will) go. Moreover, if they can obtain a bank charter, I see SQ as a potential disruptor to even the largest financial institutions. Given these prospects, the potential rewards outweigh the risks with SQ stock.

The Bottom Line on SQ Stock

Considering both the recent history of SQ stock weighed against the potential, I recommend taking a partial position in SQ before earnings. Traders may feel understandably wary of Square after the beating bulls took following the second-quarter report.

However, SQ stock tends to beat earnings. Moreover, many of these reports have led to substantial stock increases in the past. SQ has already fallen about 40% from all-time highs, so I see stronger potential for an uptick. Still, given the potential for a downturn and China-related fears, traders cannot completely discount the possibility of further near-term selling.

Nonetheless, with the company’s potential as a disruptor with all things money, long-term investors need at least a partial position in SQ stock. Although traders cannot write off the possibility of another bad earnings report, the positives exponentially outweigh the negatives long-term.

As of this writing, Will Healy is long SQ stock. You can  at @HealyWriting.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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