Square (SQ) will report their Q1 results today after the close. The options market is implying about a 6.5% move in either direction which is a little rich to the average 5.25% one-day post-earnings move over the last four quarters. With the stock near $73.50, the May 3rd weekly 74.50 straddle (the call premium + the put premium) is offered at about $5, if you bought that, and thus the implied move you would need a rally above $79.,50 or a decline below $69.50 by Friday’s close to make money.
Shares of SQ have traded in a fairly wide range over the past year trading between $50 and $100, with the stock over the past few months find a home very near them mid-point, with most of the stock’s 31% ytd gains coming in January:
Wall Street analysts remain fairly mixed on the stock with 16 Buy ratings, 18 Holds and 4 Sells, their trepidation largely rests on valuation, with the stock trading about 100x 2019 expected adjusted eps of 74 cents, and nearly 14x expected 2019 sales of $2.26 billion, growing at 42% year over year. On a GAAP basis, eps swings to a small loss equivalent to a $10 million loss in net income.
Estimates and Forecasts via Bloomberg:
* 1Q adjusted EPS estimate 8 cents (range 6 cents to 9 cents); Square forecast 6 cents to 8 cents
* 1Q adjusted revenue estimate $479.3 million (range $468 million to $492 million) vs forecast $472m to $482m
* 2Q adjusted EPS estimate 18 cents (range 14 cents to 23 cents)
* 2Q adjusted revenue estimate $556.6 million (range $529 million to $589 million)
* FY adjusted EPS estimate 74 cents (range 53 cents to 78 cents) vs forecast 74 cents to 78 cents as of Feb. 27
* FY adjusted revenue estimate $2.26 billion (range $2.13 billion to $2.36 billion) vs forecast $2.22b to $2.25 billion
RBC Capital’s Dan Perlin who rates the stock a Buy with an $88 twelve month price target highlighted the following things to watch for in the report in a research note last week:
My Take into the Print: I am hard pressed to think that investors at this stage of the game are going to get hung up on valuation and the negative effect on margins from spending on new offerings and geographic expansion. That said it is important to remember that the stock was wrapped up in a bit of mania in 2018, at its highs in early October the stock was up nearly 200% on the year, only to see the stock cut in half in a matter of months. Valuation doesn’t matter until it does.
So what’s the trade?
If you are inclined to think that the stock’s consolidation between $70 and $80 since it last reported in late February has set the stage for a breakout of this range on a beat and raise then consider the following defined risk trade idea:
Bullish Trade Idea: SQ ($74.50) Buy June 75 / 90 call spread for $3.50
-Buy to open 1 June 75 call for $4.20
-Sell to open 1 June 90 call at 70 cents
Break-even on June expiration:
Profits of up to 11.50 between 78.50 and 90 with max gain of 11.50 above 90
Losses of up to 3.50 between 75 and 78.50 with the max loss of 3.50 below 75
Rationale: this trade idea risks a little less than 5% of the stock price offering a break-even in nearly 7 weeks up nearly 6% with a potential payout of up 21%.
If you are inclined to think that decelerating revenue and margin growth could weigh on investor sentiment, especially those who are concerned with high valuation then consider the following trade idea:
Bearish Trade Idea: SQ ($74.50) Buy May 74 – 68 put spread for $2
-Buy to open 1 May 74 put for 2.75
-Sell to open 1 May 68 put at 75 cents
Break-even on May expiration:
Profits of up to 4 between 72 and 68 with max gain of 4 at 68 or lower.
Loses of up to 2 between 72 and 74 with max loss of 2 below 72
Rationale: this trade idea risks 2.7% of the stock price with a break-even down 3.3% with a max profit potential of 5.5% if the stock is down 8% in a little more than 2 weeks.