Behold Square (SQ) , the Jack Dorsey led (not sure if that is or is not a positive) fin-tech giant that has enabled sellers with an ease of transaction that had been revolutionary. From tools that accept payment through contactless terminal hardware, or through either magnetic strip or chip readers, as well as the provision of organizing, reporting and analyzing data for clients as well as creating a next day transaction settlement environment.
The stock, which is up huge year over year but really range-bound for the past six months now, experienced a bit of a pop (5.5%) on Monday after Bloomberg News broke the story that the company may be planning to offer checking and savings accounts to small business customers. According to Bloomberg, evidence of such a plan appears to be hidden code found inside a recent update to Square's app for the Apple (AAPL) iPhone and iPad. The code update references both types of accounts and indicates that the checking version will integrate with Square's existing debit card for business. The story also explained that Square may be looking to differentiate itself by passing up on monthly service fees tied to minimum balances or overdrafts.
Clearly this is a move on the businesses of traditional commercial banking, and should likely be taken as a threat in terms of potential lost market share for the likes of JP Morgan (JPM) , Bank of America (BAC) , and Sarge fave Wells Fargo (WFC) . Looking back, remember that Square received both federal and state government approval to open a bank in Salt Lake City, Utah, by the name of Square Financial Services that actually launched operations in March of this year.
(See Sarge's Reopening portfolio, here.)
Almost Three Weeks Ago
Three weeks back, Square reported the firm's first quarter financial performance, posting much larger than expected adjusted earnings as well as a surprise GAAP profit on revenue generation of $5.06 billion. That number was good for growth of 267%, and incredibly beat the street by more than $1.7 billion.
It was a Bitcoin story. Bitcoin revenue grew to $3.51 billion in Q1 2021 from $1.76 billion a quarter (Q4 2020) earlier. Bitcoin gross profits increased from $41 million to $75 million over the same period. The Cash App still grew nicely, up 139% y/y to $529 million ex-Bitcoin. Growing rapidly? Yes. Still dwarfed by the Bitcoin side of the business? Also yes.
The Chart
Interestingly, this appears to be a basing period of consolidation after a tremendous run for these shares from a low around $32 in March 2020 to that $283 high you see here in February of this year. I just don't know how many stocks that get stuck in a basing pattern like this that some might simply refer to as range-bound, and exist in a roughly $90 range. This is amazing.
The stock rallied $90 from January into February, then gave up $90 from February into March, then rallied $90 from March into April, before giving up $90 again from April into May. Investable? I don't know. Certainly tradable. Even here after nearly an $11 run on Monday and another $3 to $4 tacked on this morning, the shares exist much closer to the bottom of this range than to the top or even the center. Does that make the name a short-term buy?
The shares have taken their own 300 day SMA and could if not today, at some point this week, take the 21 day EMA, bringing a whole different kind of trader back on board.
Investment Idea
- The stock still trades at 137 times forward looking earnings. Can you count on this un-rotation to continue? Just don't.
Trade Idea If You Have The Dough (minimal lots)
- Purchase 100 shares of SQ at or close to $216.
- Sell one SQ July 16th $230 (close to the 50 day SMA) call for a rough $10.
- Sell one SQ July 16th $190 (close to support) put for roughly $5.
Net Basis: $201
Note: Worst case... the trader ends up long 200 shares at a net basis of $195.50 with the shares trading below $190. Best case? Trader is called away at $230 for a profit of 14.4%.
Trade Idea If You Are Cash Poor (minimal lots)
- Purchase one SQ May 28th $220 call for a rough $4.
- Sell one SQ May 28th $230 call for about $1.20.
Net Debit: $2.80
Note: Stock goes lower, trader loses $280. Best case? Stock closes this Friday above $230. Trader brings home $1K after betting $280, for a profit of $720.
(Apple and Wells Fargo are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
Join us on May 26th for Real Talk, a special Real Money webinar featuring reopening portfolio picks from Chris Versace, Stephen "Sarge" Guilfoyle and Ed Ponsi. Sign up for the webinar to see them discuss and debate their portfolios.
