Payment processing company Square (NYSE:SQ) received an analyst downgrade, which sent the stock plunging. As of 2:30 p.m. on Monday, the day of the downgrade, Square had fallen by roughly 14%. Even after today's drop, Square is still up by more than 200% so far in 2017.
In a nutshell, this was Square's first real negative news in some time. The company has handily beaten analysts' expectations for several quarters, is growing at impressive rates, and is doing a fantastic job of building a financial ecosystem for small businesses.
The latest upside catalyst was the announcement that Square was testing bitcoin in its Square Cash app, which many people feel could be a major revenue boost for Square and a big step toward mainstream acceptance for the digital currency. Unfortunately, that's exactly what the analyst who downgraded in the company cited in his notes.
According to BTIG analyst Mark Palmer, Square's rally is "overdone," and tying the company's future success to bitcoin could potentially have a negative effect. Palmer said that "bitcoin could provide a marginal contribution to Square's revenues if the trial succeeds, it becomes a permanent feature for all Square Cash users, and the company starts to charge a fee for trades."
Square rallied by about 11% following the announcement of the Square Cash bitcoin test, so today's drop approximately erased those gains. And as I mentioned, Square has performed tremendously well thus far in 2017, so this could just be knee-jerk profit taking after the first hint of bad news the company has had in quite a while.