(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Since reporting quarterly results, shares of the Jack Dorsey-led Square Inc. (SQ) have been ripping higher, rising by about 12%, currently trading around $54.50. An analysis of the technical charts and the options market suggests shares could increase as high as $61 or nearly 12% by mid-June.
Two Investopedia articles previously noted shares of the payment processor were likely to fall, and although the stock did not get all the way to $42, they did drop to around $43.70. However, now the chart is turning positive after reporting first-quarter earnings that beat analysts’ estimates by nearly 12% at $0.06 per share, while revenue topped by almost 5% at $306.82 million. (See also: Square's Soaring Stock Is Due for a Correction and Square's Stock Is Facing Steeper Declines.)
Bullish Options Bets
The options set for expiration on June 15 saw a great deal of activity on Thursday, for the $60 strike price, with the open interest for the calls climbing by nearly 29,000 contracts to roughly 37,500. The calls cost about $1 to buy, meaning the stock would need to rise to above $61 to break even. The total dollar value of the open calls at the strike price is nearly $4 million.
The long straddle options strategy for the June expiration implies a rise or fall in the price of Square by just over 10% from the $55 strike price. It places the stock in a trading range between roughly $49.50 and $60 by expiration. The calls have a slight advantage at that expiration with approximately 10,500 open calls to only 8,300 open puts.
Additionally, there are roughly 41,000 open put contracts at the $45 strike price, but that open interest had not increased since May 4, when the stock was trading at closer to $48.
Positive Technical Setup
The technical chart also suggests that shares of Square rise to an area of around $61 over the next several weeks. Depending on the slope of the trend, perhaps higher. Shares broke out on May 4, crossing a critical downtrend, and have risen sharply above a resistance level around $52, and that price should now offer technical support, should shares retrace lower. Additionally, Square has traded in a well-defined channel since November, and should the price ultimately continue to rise to the upper range, it could increase to about $61.
Analysts Remain Skeptical
Analysts are not as bullish on Square despite raising their revenue estimates for the second quarter by nearly 8% over the past 30 days. Forecasts for the second quarter are now calling for revenue growth of 50% versus the same period a year ago to $359.99 million, while earnings are seen growing by 68% to $0.12 per share. However, still, analysts have an average price target on the stock of $49.61, nearly 8.9% lower than the current price.
For now, the options and the chart appear to point to a stock price that is likely to continue rising over the near term while analysts seem more skeptical on the longer-term outlook.
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.