Square Stock Breaks Out After Analyst Upgrade

Square, Inc. (SQ) shares rose 6% during Tuesday's session after Raymond James upgraded the stock to Market Perform. Analyst John Davis believes that the short thesis has played out, creating a more balanced risk-to-reward profile. The analyst added that the company's business-to-business seller card is gaining traction and could become a meaningful contributor to its future growth prospects.

The move comes shortly after Argus initiated coverage on Square stock with a Buy rating and a price target of $94 per share, citing its technological innovation, strong brand recognition, and growing merchant acceptance. Analyst Stephen Biggar anticipates 56% annual average earnings growth over the next two years, which justifies his target multiple of 82 times FY 2020 earnings. Many other analysts have been equally bullish on the stock.

Last quarter, Square reported better-than-expected second quarter financial results, but second quarter guidance failed to impress the market. Management believes that Cash App could continue to be a strong growth driver, with volume growing nearly 2.5 times year over year, reflecting network effects, reach, and engagement improvements.

From a technical standpoint, the stock broke out from trendline resistance to retest prior highs from March. The relative strength index (RSI) rose toward overbought levels with a reading of 69.55, but the moving average convergence divergence (MACD) continued its bullish trend. These indicators suggest that the stock could see some near-term consolidation before continuing its intermediate-term move higher.

Traders should watch for some consolidation above trendline support at $74.00 and below prior highs of around $82.00 over the coming sessions. If the stock breaks down from trendline support, traders should watch for a move toward the 200-day moving average at $71.81 or the 50-day moving average at $68.85. If the stock breaks out higher, traders could see a move toward all-time highs near the $100 level.

The author holds no position in the stock(s) mentioned except through passively managed index funds.