What happened

Square (NYSE:SQ) stock jumped 11.7% in September, according to data from S&P Global Market Intelligence. For context, the S&P 500 edged up 0.6% last month.

It's since given back those gains, however. Shares dropped 13.1% so far in October through Monday, a period in which the tech-heavy Nasdaq declined 3.9%. 

So far in 2018, the financial technology company's shares have posted a whopping 148% gain versus the S&P 500's 9.5% return.

A person's hand swiping a smartphone in front of a Square Register that's sitting on a counter along with plates of bagels and coffee machines.

Square Register. Image source: Square.

So what

We can largely attribute Square stock's strong September performance to a couple of positive comments from Wall Street analysts, which resulted in the stock soaring 10.8% on Sept. 25.

The most bullish opinion came from the Nomura Instinet analyst who covers the stock. The analyst said that "the payment processing company should be considered alongside the largest technology, internet, and e-commerce stocks in the business, arguing that Square has been just as much of a disruptor in its niche and has embraced innovation to build a competitive advantage," as fellow Fool Dan Caplinger wrote at the time. Nomura jacked up its 12-month price target on the stock by 45% to $125 per share, from $86. That represented a 45% premium on the stock's closing price of $86.04 on Sept. 24. It also represents the same premium on the current share price, as shares closed at $86.06 on Monday, Oct. 8.  

Indeed, many of my fellow Fools are also very bullish on Square's long-term growth prospects and, hence, its stock. "There's a ton of growth potential across Square's business segments," writes my colleague Matthew Frankel. Matt views Square's Cash App as the part of its business "that has the most exciting long-term potential." 

OK, so what happened that's driven the stock down 13.1% in October?

A part of the reason Square stock is down this month is that the market has punished high-flying stocks, particularly in the tech realm, in recent trading sessions. But the bigger reasons are two news items that came out on Monday, which caused the stock to plunge 8.6%. First, there was some analyst concern expressed about the increased risk to the company stemming from its recent announcement that it will allow merchants to offer installment financing to customers. Second, CEO Jack Dorsey sold more than 103,000 shares of Square stock on Friday.  

Now what

Investors shouldn't concern themselves with Dorsey's stock sales, as they "appear to have been preplanned," so they "don't necessarily reflect how [he] feels about the company's growth trajectory or stock valuation," Matt wrote. However, Matt did concede that Square's entrance into the consumer installment financing arena will increase the company's credit risk -- an opinion with which I agree.

When it released its strong second-quarter results, Square increased its full-year 2018 revenue and GAAP (generally accepted accounting principles) earnings guidance and maintained its previously issued adjusted earnings outlook. It expects:

  • Revenue of $3.19 billion to $3.22 billion, up from prior guidance of $3.03 billion to $3.09 billion
  • Adjusted revenue of $1.52 billion to $1.54 billion, up from $1.45 billion to $1.48 billion. At the midpoint, this represents growth of 55% year over year.
  • Net loss per share of $0.21 to $0.17, up from a net loss of $0.28 to $0.24. At the midpoint, this represents a 12% narrowing of 2017's loss per share of $0.17. 
  • Adjusted earnings per share (EPS) of $0.42 to $0.46, which is unchanged from the prior outlook. At the midpoint, this represents 63% growth over last year's $0.27 result. 

It goes without saying that Square is growing phenomenally. Not surprisingly, investors will need to pay up for these rosy growth dynamics: The stock is priced at 110 times forward (adjusted) earnings estimates. That said, the company has a good track record of beating Wall Street's adjusted earnings forecasts -- it beat them in three of the past four quarters. Thus, there seems to be a solid chance that Square will continue to grow adjusted earnings faster than analysts expect, so its stock might not be as pricey as it currently seems.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.