(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Jack Dorsey's Square Inc. (SQ) have more than doubled in 2018, and may be about to rise even higher. Options traders are betting shares of the payment processor surge by roughly 10% by the middle of September. An analysis of the technical chart also suggests that shares of the stock may be on the rise as well.
Square is expected to report second-quarter results on August 1 after the close of trading. Analysts are forecasting massive earnings and revenue growth for the company. (For more, see also: Square's Stock Is Facing Steeper Declines.)
The options set to expire on September 21 are overwhelmingly bullish at both the $70 and $75 strike price. The number of bets that Square will rise favors the wagers it will fall by a ratio of 2 to 1 at the $70 strike price, with roughly 8,000 open call contracts. With the options trading at $6.50 per contract, it suggests the stock rise by about 6% from its current price around $72.50 to $76.75, if holding the options until expiration.
The bets at the $75 strike price are even more bullish, with the number of wagers shares will rise outweighing the bets it falls by over 10 to 1, with over 11,000 open call contracts. A buyer of the calls would need the stock price to rise to about $79.40 to break even if holding the options until expiration. The call options cost about $4.40 per contract.
The technical chart also suggests the stock may continue to rise. Shares broke out above technical resistance at around $66.5 at the start of July. Now the technical resistance level should act as technical support. The relative strength index has also been trending higher, suggesting momentum is still bullish in the stock.
One reason for positive sentiment is the strong earnings outlook for the company when it reports second-quarter 2018 results. Analysts are forecasting earnings to climb by over 61% and revenue to grow by over 53%. Even more impressively, Analysts have upped their earnings outlook by about 7% and revenue by nearly 2% over the past month.
It isn't just the quarter that is expected to be strong; the full year outlook is supposed to be robust as well, with earnings seen climbing by nearly 69% on revenue growth of 51%. (For more, see also: Square's Overbought Shares May Plunge in Short Term.)
The bullish sentiment for the stock comes for what is expected to be a strong quarter and outlook for the year. But that also means Square will need to deliver when it does report results next week, or the bullish sentiment could be in for a rocky ride.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. 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 performance.