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Why Square Stock Just Dropped 6%

By Rich Smith - May 10, 2021 at 1:50PM

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Even Square's fans seem frightened of the valuation.

What happened

Shares of point-of-sale credit card processor Square (SQ -6.72%) skidded 6% on the Nasdaq as of 12:25 p.m. EDT on Monday, just a few days -- but only two trading days -- after the company blew away analyst estimates in its fiscal Q1 2021 financial report.

Last Thursday evening, Square reported tremendous revenue growth -- up 267% year over year. It also reported its third straight profitable quarter, a quarter that was: (1) much better than its year-ago quarterly loss, (2) more than twice as profitable as analysts had predicted, and (3) secured the company's longest quarterly "winning" streak of profitable quarters ever.    

That news sent Square stock up a respectable 4.2% in Friday trading, the day after the earnings news came out. Today, however, the company has already given back all those gains and is actually trading below what its stock cost before the earnings news was released.

White arrow declining sharply atop a stock tickertape display bathed in red

Image source: Getty Images.

So what

Why? Well, the whole Nasdaq is in a bit of a funk today, and while it's true that Square itself trades on the NYSE, because it is considered a sort of tech stock, on any given day, it shares tend to trade along whatever direction the tech-heavy Nasdaq is heading.

It probably didn't help, of course, that the sole new analyst reaction to earnings today -- an increase in price target to $269, from BMO Capital Markets -- stopped short of actually recommending that investors buy Square shares.

Now what

In a note out this morning, TheFly.com reports that BMO raised its price target on Square shares, citing the company's "broad-based Q1 earnings beat" and the beneficial effect that an improving economy and a flood of government stimulus money are having on its business. Despite this optimistic prognosis, however -- and the fact that BMO apparently thinks Square stock is worth 23% more than it currently costs -- the analyst declined to recommend the stock.

Why not? Call me a cynic, but I kind of wonder if the stock's 530-times-earnings valuation might have something to do with it. After all, even if Square succeeds in hitting Wall Street's target for 42.5% annualized earnings growth for it over the next five years, 530 times earnings is still a pretty penny to pay for that growth. And if it somehow misses that target ... well, look out below.

The simple fact of the matter is, there's a lot of good news already priced into Square stock at these levels -- and a lot more risk than potential reward in the stock.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.

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