Square Stock News and Forecast: Market sells off SQ after surprise earnings, acquisition announcement

• SQ shares dropped Monday after payment provider announced acquisition of Afterpay.
• Square also released Q2 earnings on Sunday and missed revenue projections.
• SQ stock is trading within a descending price channel.

This is one of those days it is not hip to be Square (NYSE: SQ). Already scheduled to release second-quarter earnings this Thursday, on Sunday Square surprised pretty much everyone with both an all-stock deal to acquire Australian “buy now, pay later” firm Afterpay for $29 billion and early Q2 results. A double-whammy it was. The steep price has some formerly eager investors reeling in their rods, with the premarket sell-off reducing the SQ stock price by as much as 4.3%.

SQ news: Afterpay acquisition

Buying Afterpay would be the largest such acquisition in Australian history. Though the deal appears to be somewhat unpopular with investors, Wall Street analysts seem to resoundingly affirm the deal’s merits. UBS writes: “The implied valuation of Square's offer is materially above our price target, but is almost perfectly in line with the consensus price target (FactSet) for Afterpay of $125.99. UBS does not cover Square, though we highlight that the consensus price target for Square is $281.76.”

The acquisition, which is slated to close in the first quarter of 2022, would enable the payments innovator to integrate the “buy now, pay later” model into both its Cash App for consumers and payment platform for commercial customers. Barclays Capital was even more bullish, believing "Afterpay makes long-term fundamentals stronger, as Square inches closer to becoming the JPMorgan Chase & Co of the future.”

Many Twitter observers, however, believe the deal will stall out Square’s stock price for the time being:

SQ earnings: Misses top line, beats on bottom line

Square’s $4.68 billion in revenue was the low point of the company’s surprise Q2 earnings release. Wall Street had expected a figure closer to Q1 revenue of $5.06 billion. Earnings per share (EPS) of $0.66, however, ran laps around expectations of $0.31. EPS was up a gigantic 267% YoY on gross profit of $1.14 billion, a 91% increase.

Additionally, gross payment volume of $42.8 billion far outstripped Q1, which handled $33.1 billion in payments. This figure demonstrates that Square is both increasing payments from existing customers as well as acquiring new ones. The company invested $170 million in Bitcoin in the second quarter, on top of the $50 million it acquired in Q1. The investment suffered an impairment loss of $45 million by the end of the quarter, however.

SQ chart: Destined to trade sideways

SQ shares rose over 200% in 2020, so it is no surprise that they have used most of this year to take a breather. Year to date, the S&P 500 has returned 17% compared with SQ’s 13.6% – an unusual sign for a much-watched growth name. Square has been trading within an ever-so-slightly descending price channel since mid-February that features three tops and four bottoms. This high number of touches would appear to mean the market expects SQ to remain in a sideways range pattern for the time being. The last top on July 26 at $268.34 provides the current target for bulls. With the recent top involving a bearish engulfing candle and the premarket shedding shares after a largely positive earnings release though, the most likely near term movement is down.

The first support is the $234.25 price level where the 50-day Simple Moving Average (SMA) sits. More support can be found at the 200-day SMA at $224.93. Traders will note, however, that SQ price did not strictly respect the 200-day when it first came into contact with it back in Mid-May. At that time, the price traded $10 to $15 below for more than a week before rebounding. If it fails to provide support again, it is possible that marketwide negativity could send it down as far as the descending lower, which coincides with support from November 2020 just above $180. To reach this nadir though would require SQ price breaking through support structures at both $210 and $200 though, which most market participants may think unlikely.

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SQ 1-day chart