Square’s (SQ) stock has been pummelled, and now, traders are betting the stock drops back to its recent lows in the weeks ahead. The stock is suffering along with many others from the prospects of an economy that is being impacted by the declining conditions as a result of the coronavirus. As the economy slows and shuts down, it seems natural that consumer spending will slow materially, and that is likely to affect Square’s future revenue and earnings power negatively.
The company lowered its first quarter guidance on March 24 and noted a significant decline in gross processing volume for sellers of more than 25% year over year in the final days of March. On March 31, Visa (V) cut its guidance for the second time. Meanwhile, on March 24, Mastercard (MA) reduced its guidance for the second time and pulled its full-year guidance. The weakness in these two payment processes confirms the weakness in consumer spending.
Cutting Its Outlook
Square now sees first quarter revenue of $1.30-1.34 billion from previous guidance of $1.34-1.36 billion. The company not only lowered its guidance but also increased the range, suggesting the visibility into the final weeks of the quarter was diminishing. Additionally, the company pulled its full-year 2020 revenue guidance from what had been a range of $5.90-5.96 billion.
As a result, analysts have cut their first quarter revenue estimates to $1.306 billion. Meanwhile, forecasts for the second quarter have fallen by roughly 21.3% to $1.167 billion. But despite the sharp drop in second-quarter revenue, analysts, currently, see the potential impact in the third and fourth quarters as less severe, lowering third quarter estimates by 12.9% to $1.355 billion, and by 8% in the fourth quarter to $1.465 billion. But given the steepness of the declines the economy recently has seen and the surging unemployment, those revenue estimates may be too high.
The weak economic landscape and the potential for further revenue estimate reduction are likely reasons why traders are betting that Square’s stock will decline further in the coming weeks. The open interest for the $42 puts for expiration on June 19 increased by nearly 4,200 contracts on April 6. The puts were traded on the ASK, indicating they were bought, and is a bet that the stock declines. The trader paid about $6.25 per contract, and that means the equity would need to fall to around $35.75 by the expiration date. It would amount to a decline of about 25% from the current stock price of $47.85 on April 6.
The stock has been in a steep downtrend since the end of February and, technically, looks very weak. That downtrend should serve as a healthy level of technical resistance, which could result in the stock retesting its recent low around $36.50, which is a decline of about 23.7% from its price on April 6.
Should the stock rise above the downtrend, it would be technically bullish. It could result in the stock rising to around $56.25, an increase of about 17.5% from its price on April 6. Additionally, at this point, it is tough to tell just how long this economic slowdown may last. It is entirely dependent on the length of time the coronavirus continues to spread or that it remains a risk to the public health. Should the coronavirus abate sooner, it could result in the economy and Square seeing a surge in growth; if it lasts longer, it could drag revenue even lower.
At this point, everything in the economy, the stock market, and Square are fluid with obvious risks and several uncertainties.
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Disclosure: I am/we are long V,MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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