Square Stock May Be Due for a Cooling Off Period

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Like virtually all publicly traded companies, payment processing specialist Square (NYSE:SQ) saw its market value plummet when the novel coronavirus struck the U.S. However, you can’t keep an innovative company like SQ down for too long. Thus, it didn’t surprise too many people when Square stock consistently trekked higher since around mid-April.

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Moreover, investors shouldn’t consider this bullishness to be a fluke. In the middle of last week, management announced that it was getting back into the food delivery game. In a press release, the company stated:

In this challenging new business environment, it’s more important than ever that sellers have access to the tools they need to sell online quickly, efficiently, and affordably…On-Demand Delivery is just the latest feature we’ve built to help sellers take their business online.

Less than a year ago, SQ announced the sale of Caviar, its food delivery business, to DoorDash for $410 million. However, I wouldn’t necessarily consider Caviar’s sale a wasted one, even in hindsight. As XpresSpa (NASDAQ:XSPA) demonstrated, you can turn lemons into lemonade by quickly building a coronavirus-centric business model.

Further supporting the case for Square stock, the underlying company benefits from two big developments. First, the May jobs report indicated that the economy added 2.5 million jobs. Most of the reopened positions were in the leisure and hospitality industries, which substantially helps Square’s multiple small business clients.

Second, retail sales in May printed a huge increase in consumer activity. Of course, one of the implications is that Americans were sick and tired of staying at home all day. Naturally, the jump in discretionary purchases bodes well for small businesses and Square stock by logical deduction.

It’s Time to Get Tactical With Square Stock

Over the past few years, I’ve generally held positive views toward SQ. Primarily, the company levels the playing field for small businesses. By providing convenient point-of-sale transaction equipment, along with a comprehensive suite of online solutions, a startup can quickly start challenging the target industry’s alpha dogs.

Additionally, the tech firm has been practicing contactless service before it became a thing. These attributes will likely only grow in relevance in the future. Therefore, I maintain my long-term bullishness in Square stock.

However, I can’t help but notice that shares are technically trading at overbought levels. Further, what turned out to be great news earlier – the reopening of restaurants and cafes where independent entrepreneurs ply their trade – has again turned into a question mark. That’s because the coronavirus is rearing its ugly ahead seemingly for a second round.

On June 26, new daily infections in the U.S. breached the 40,000 mark for the first time. After supposedly flattening the curve, this news is especially devastating for small businesses. Due to the risks associated with keeping things as they are, Texas halted reopening its economy. Politically, I find this incredibly significant because the Lone Star State isn’t exactly what you would call liberal.

Should the situation worsen around the country, you would expect blue states to act more aggressively. And that’s exactly what’s happening. In California, Governor Gavin Newsom reissued a stay-at-home order for Imperial County, which is its worst-hit county.

Of course, you can make the argument that Square stock is somewhat insulated from the resurgence of cases thanks to its On-Demand Delivery. Despite my bullishness in SQ, I’m skeptical. If we have another outbreak similar in scope to what we saw in March and April, all bets are off.

Consumer Economy Really Isn’t Great

Even if we avoid a health-related catastrophe, I would still adopt a tactical approach with Square stock. Whether collectively healthy or not, the consumer economy does not provide a confident read.

In one of the most alarming reports, New York Times’ contributors Emily Badger and Alicia Parlapiano noted that the richest among us have cut their spending across all other demographics. That has imposed a negative trickle-down effect, disproportionately hurting the service workers that depend on affluent consumer spending.

Of course, it begs the question, if the rich aren’t spending, why would the ever-declining middle class?

Further, if I’m interpreting market data correctly, the rise of Peloton Interactive (NASDAQ:PTON) may eventually pressure Square stock. Apparently, the rich are afraid to go to the gym. Thus, they’re buying fitness equipment like Peloton so they don’t have to.

But that also suggests that wealthier consumers are looking to make their dollars stretch. If that’s the case, you would expect that behavior to also trickle down to lesser privileged people. In the nearer term, Square stock could face a correction.

Don’t get me wrong – I’m not saying to abandon the long-term thesis, which is still intact. But if you’ve been looking to buy SQ, you might want to wait just a little bit.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.