Nobody likes losing money. It doesn’t feel good. It gets you out of your investing comfort zone. And if you’re a novice investor, you run the risk of overreacting when tried-and-true winners like Square (NYSE:SQ) stock turn red for a few days.
It has been a great year so far for Square. The payment processor company is up more than 120% year-to-date. But like most other tech companies, SQ took a tumble in the last few days.
Since Sept. 1, Square lost 15% of its value seeing its market capitalization fall under $62 billion.
That’s more than just a little uncomfortable. It’s downright painful.
But rather than wallowing in our collective misery, downturns such as these are an opportunity for investors to use a critical eye to take a fresh look at the names in their portfolios.
Does the bull thesis for Square still hold up? Are there long-term headwinds? Do we still believe in company management? Is this downturn a signal to take profits, or is it an opportunity to buy Square stock at a suddenly discounted price?
These are the sorts of questions I’m used to answering with Growth Investor, only many of the names I focus on there are more obscure and have even greater potential to climb higher in the years ahead.
With all of that in mind, let’s take a closer look.
The Reasons for the Downturn
The Nasdaq Composite fell more than 10% in just three trading sessions to reach correction territory. And while there’s no clear reason why investors suddenly began taking money out of the big tech stocks, there was some unusual options trading in a few of the bigger tech names that could have been a catalyst for the downturn.
Corrections are a part of investing, with broader stock market corrections happening on average every two years. But corrections don’t mean that the market is sick. In fact, they’re inevitable.
Rich Woodworth, a vice president at PGIM Investments in New Jersey, points out to U.S. News & World Report that the stock market saw corrections in 15 of the last 25 years. But even with that track record, the overall market averaged a return better than 10% annually in those years.
So, while SQ stock is one of the names most affected by this month’s correction of tech stocks, it’s not alone, and there’s nothing specific to Square that is causing it to tumble.
Why Square Stock Still Makes Sense
The novel coronavirus has changed the way people handle money and do their banking. More than ever, people are getting away from cash and ATM transactions and using fintech solutions to perform digital transactions.
Square is best known for its plastic dongles that small- and medium-sized businesses can use to insert into a smartphone or tablet to process credit card payments.
But the biggest headwind for the company has been its Cash App business. The Cash App is a peer-to-peer platform that allows Square customers to transfer money, use debit card rewards and invest in either equities or bitcoin.
The Cash App really took off earlier this year when people realized that they could quickly receive government stimulus checks through the CARES Act.
MoffettNathanson analyst Lisa Ellis projects the Cash App generating $5 billion in annual revenue and $2 billion in earnings for Square in five to seven years.
Already, the Cash App is helping Square break through with some outstanding earnings reports. In the second quarter, the company reported earnings per share of 18 cents, which beat analysts’ expectations by 22 cents per share. Revenue increased by more than 64% on a year-over-year basis to $1.92 billion.
This May Be the Perfect Buying Point
Remember, it wasn’t that long ago that SQ stock was at record highs. You may have caught Nancy Tengler, chief investment officer at Laffer Tengler Investments, on CNBC with an extremely bullish take on Square.
In fact, she said the biggest problem she had with Square was finding an entry point as the company kept setting record highs.
“If you aren’t in, it’s very difficult to step in here,” she said on Aug. 28. “We’ll get a pullback at some point and that would be an opportunity.”
It didn’t take long for that opportunity to present itself.
The Bottom Line on SQ Stock
In May, I called Square “the ideal 21st century fintech stock.” I still believe that’s true. Square is just tapping into its potential now and the transformation to peer-to-peer digital payment is at hand, thanks to Covid-19.
The only thing that’s changed is that you can pick up SQ stock today at a discounted price. As Tengler says, the pullback in Square is an opportunity that shouldn’t be missed.
Square stock as an ‘A’ rating in my Portfolio Grader right now.
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Source: Investor Place