Outlook on SQ - correction coming soon?

14 thg 3, 2018

SQ has had an incredible run almost doubling since it's February 9th lows. Does it have more room to run or is this a bubble waiting to pop? Square has had noteworthy growth in their payment processing platforms with revenue growing at 40% year-over-year. They have become the chosen platform for Point-of-sale transactions for small businesses and their "Cash App" rivals Paypal's Venmo. Square is also a favorite investment among millenials. Robinhood ranked it #18 top stocks held by users on its platform. Its a popular company and investment proven by the price action of its stock. But does it's popularity merit it's valuation? It currently trades at nearly 10x revenue which is extremely high even for it's 40% growth rate. It generates a quarterly net income loss of $-16m, about 10% of its total revenue. The lack of earnings isn't so terrible as long as they can continue accelerating growth, but the stocks 10x multiple of revenue valuation is concerning. It currently trades at 3.6 Standard Deviations from its 100-day moving average. The last time it was so far away from its MA, it was November 21st and the stock subsequently corrected 30%. So is another 30% correction coming soon? Looking at the chart, I overlayed QQQ on its own relative scale to provide some context to what the rest of the Tech sector has been doing. SQ significantly outperformed the QQQs in the november melt-up compared to the current run. These are on their own relative scales but this goes to show how SQ was an anomaly in November while it trades more closely with the rest of Tech today. At this point, I'm hesitant to think another 30% correction is imminent, but any significant drawdown in Tech will be accompanied by an ever larger move by SQ. I'm looking to play this with options, specifically long straddle with the momentum being so heated and any correction likely sharp.