Square, Inc. (SQ) stock rallied 13.0% to an all-time high on Friday after the company beat third quarter 2020 top- and bottom-line estimates by wide margins. The e-commerce application provider earned $0.34 per share, $0.18 better than consensus, posting a 34% profit increase compared to the same quarter in 2019. Revenue surged 140% year over year to $3.03 billion, exceeding $2.07 billion estimates by nearly 50%. Transaction-based gross profit rose a healthy 35% year over year, while subscription and service-based gross profit rose 76%.

Key Takeaways

  • Square blew away third quarter 2020 profit and revenue estimates.
  • Wall Street has grown more cautious on Square stock after a 300%-plus 2020 return.
  • The stock has risen more than 30% in just five trading days.
  • A pullback could offer a low-risk buying opportunity in the $170s.

Citigroup analyst Peter Christiansen upgraded Square stock to "Buy" from "Neutral" and raised his price target to $215 after the glowing report, highlighting the company's ability to overcome diminishing stimulus tailwinds, tough comps compared to prior quarters, and a lofty 300-plus price-to-earnings ratio (P/E). The analyst pulled no punches in his commentary, stating, "We're now a believer that Square's secular growth opportunity is too big to ignore ... even from here."

Even so, Wall Street has grown more cautious due to historic share gains and high valuation. Consensus stands at a "Moderate Buy" after the most recent upgrades, based upon 17 "Buy" and 6 "Hold" recommendations. Two analysts now recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of just $44 to a Street-high $240, while the stock is set to open Monday's session about $5 above the median $187 target.

Secular is a descriptive word used to refer to market activities that occur over the long term. Secular can also point to specific stocks or stock sectors that are unaffected by short-term trends. Secular trends are not seasonal or cyclical. Instead, they remain consistent over time.

Square Daily Chart (2015 – 2020)

Chart showing the share price performance of Square, Inc. (SQ)
TradingView.com

The company came public at $11.20 in November 2015 and fell to an all-time low in the single digits three months later. It tested that support level successfully in June and turned sharply higher, entering a powerful trend advance that continued into October 2018, when the stock topped out just above $100. It sold off to a seven-month low at year end and turned higher into 2019, entering a trading range that broke to the downside during the first quarter's pandemic decline.

Bullish price action completed a round trip into 2019 range resistance in May 2020, ahead of a June breakout that quickly mounted the 2018 peak. A momentum buying wave then set into motion, nearly doubling the stock price into Monday's opening print. The on-balance volume (OBV) accumulation-distribution indicator has matched upside tick-for-tick and has also reached an all-time high, signaling strong institutional buying interest.

Square Short-Term Outlook

The stock has now tripled in price since the first trading day of 2020, lifting above $200 for the first time in Monday's pre-market session. However, it has now gained more than 30% in just five trading days, setting off all sorts of short-term overbought signals that raise the odds for a consolidation or pullback lasting several weeks, at a minimum. It has also printed three unfilled gaps at $160, $171, and $180, with at least two of those holes likely to fill in coming weeks.

In turn, risk-averse market players may wish to sit on their hands and wait for a decline into the low $170s before jumping on board or opening a first tranche. Keep one eye on the 50-day exponential moving average (EMA) in this regard because the moving average is now ticking higher in the mid-$160s and should narrowly align with the second gap by early December. Exposure around that level could pay big dividends in 2021, with good odds for a trip toward $300.

Overbought is a term used when a security is believed to be trading at a level currently above its intrinsic or fair value. Overbought generally describes recent or short-term movement in the price of the security, reflecting an expectation that the market will correct the price in the near future.

The Bottom Line

Square stock is trading sharply higher after a blowout third quarter 2020 earnings report, but overbought technical readings could set up a profitable buy-the-dip scenario.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.