(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Square, Inc. (SQ) stock has fallen 37% from its peak in late September through November 20. Now options traders are betting the stock rebounds 13% by the start of early next year. The stock has fallen sharply as part of the broader technology-led stock market sell-off.
Analysts have been reducing their earnings forecasts for the company for the fourth quarter and future years over the past 30 days.
The call options for expiration on January 18 have seen increasing levels of open interest at the $65 strike price. The number of open calls has risen by nearly nine-times to 26,000 open contracts over the past day. It suggests that a buyer of the calls would need the stock to increase to $69.75 to earn a profit, from the stocks price of $61.82 on November 20.
Reducing Fourth Quarter Forecast
Analysts have lowered their fourth quarter earnings forecast by 8% to $0.14 per share. Meanwhile, revenue estimates have increased by 4% to $453.95 million. Analysts now see earnings growing a stunning 70% in the fourth quarter.
The good news is that analysts have increased their full-year earnings estimates 2% to $0.46. Additionally, revenue estimates have climbed 2% to $1.6 billion.
However, while 2018 estimates are rising, 2019 and 2020 have fallen. For example, analysts now estimate that earnings will grow 56% to $0.73 in 2019. That is down from estimates July for profit growth of 75% to $0.80 per share.
Square's stock doesn't come cheap, trading at a PE ratio of 87.5, which is much higher than the other payment processor stocks. Even when adjusting for the stock's 2019 earnings growth rate the stock trades with a PEG ratio of 1.6, a lofty valuation.
Traders are likely betting that the stock has fallen merely too far too fast and that a rebound may be in the works. If that is the case, any rally in the stock may not be sustainable, especially if earnings growth rates continue to decline.
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.