Over the past couple of weeks, fintech company Square (NYSE:SQ) has gone from an all-time high of more than $100 per share to less than $66 as of Thursday morning -- a drop of about 35%.
As a Square shareholder, you might think that this could be alarming. After all, my position has lost thousands of dollars in value in less than two weeks. However, I'm not worried in the least, and here's why:
Square's amazing rise and sudden correction
Before we get into the main reason I'm not worried, let's put Square's recent plunge in context. Over the past couple of years, Square has grown incredibly fast, and its stock price has soared. In fact, since I first bought shares in 2016, Square's share price has risen from about $11 to a recent high of $101.15.
That's a remarkable run. Even after the recent plunge, I'm up roughly 500% in just over two years, and Square is still higher by 89% for 2018. Although I think Square will be worth much more in the future, even the best stock returns generally don't happen in a straight upward line.
Just as one example, Netflix (NASDAQ: NFLX) is up by more than 9,000% over the past 10 years, but there was a time it fell by more than 70% (late 2011). The point: Square's drop, while it might appear dramatic, isn't out of the ordinary for a stock with tremendous long-term potential.
A closer look: Why did Square drop?
To be clear, I'm not always carefree when it comes to my stocks falling. My reaction depends on why the stock dropped.
In Square's case, there were four main reasons for the stock's recent retreat from the high:
- Square's new installment-financing platform wasn't well received by several key analysts.
- CEO Jack Dorsey sold over 103,000 shares in a planned transaction.
- CFO Sarah Friar is leaving the company.
- The overall stock market, particularly for high-growth tech stocks, has been very weak in October.
Now, the first reason certainly affects the investment thesis a bit. Adding consumer financing to its ecosystem does add an element of credit risk. However, the market reaction to this was minimal -- in fact, Square fell less than 5% from its high after Square Installments was announced.
On the other hand, the other three reasons on the list -- all of which had much more dramatic impacts on the stock's price -- aren't too important from a long-term perspective. As I mentioned, Dorsey's sale was planned, and resulted from his exercise of some options. Sarah Friar has done an excellent job as CFO, but there's no reason to believe the next CFO won't do well. And the overall market weakness has hurt, but has nothing at all to do with Square as a company.
Very little has changed with the long-term thesis
Aside from Square Installments, which I think will be a long-term positive catalyst for the company, nothing has really changed with the company itself. A CEO selling stock is generally a nonevent, especially when it was planned. Even an excellent CFO can be replaced. And shrugging off market volatility is just a part of being a long-term investor.
Square still has the same amount of long-term growth potential that it did two weeks ago. The company continues to grow its customer base and add new products to its ecosystem, and is getting more efficient. Its payment-processing business still has lots of room to grow, and the Square Cash App remains an incredible opportunity to monetize its millions of users.
The bottom line: If you still believe in Square over the long term, as I do, this recent drop is like a 35%-off sale at your favorite retailer, not a reason to be cautious.
Matthew Frankel, CFP owns shares of Square and has the following options: short December 2018 $90 calls on Square. The Motley Fool owns shares of and recommends Netflix and Square. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.