#Outperformance: A Tale of Two Techs
11/15/17
It’s no secret tech has led the equity market this year, and one of the conspicuous winners away from the FAANG stocks has been mobile payment company Square, Inc. (SQ), which on Tuesday hit the latest of the dozens of its record highs since its IPO in November 2015. The stock was up more than 200% on the year as of yesterday’s close, and this week marked its 13th consecutive week it made either a higher weekly high or weekly close.
Square (SQ) and Twitter (TWTR), 1/14/17 – 11/14/17

Source: OptionsHouse

If you haven’t heard of Square, you may have heard of its founder and CEO, Jack Dorsey, and if you haven’t heard of him, you’ve heard of the other company he helped found and still runs—Twitter (TWTR). That’s about all the two companies (and stocks) have in common, though. In addition to being different businesses, the stocks have hardly moved in lockstep. Twitter shot higher in the week after its IPO, while Square floundered for months before finding its footing in mid-2016 and marching higher. Twitter may have posted a respectable 25% year-to-date gain as of yesterday, but it’s still down more than 70% from its all-time high. Square is generating profits and branched into the UK earlier this year.

The company has also turned in several quarters of outperforming earnings, most recently on November 8, when it beat earnings and revenue estimates.1 After a post-release dip, the stock promptly strung together three days of outsized gains, and in the process pushed SQ’s valuation above $15 billion—higher than TWTR’s.2

Grumblings in some quarters over the past few months that SQ might have rallied too far, too fast have all turned out to be premature, but Tuesday’s tighter range and weaker close suggested the stock might be due to take a breather, even if it does manage to rally long-term.

Square (SQ), 9/20/2017 – 11/14/17

Source: OptionsHouse

Relatively narrow-range days like Tuesday—especially when a stock is making new highs or lows and on the heels of one or more wide-range days—can indicate a loss of momentum, and a lower close the day after one of these narrow range days can be followed by additional downside price action.

November 9’s wide-range up day broke the stock out of a short-term consolidation (with a high around $37.70), and that range presents a downside target/support level in the event of a pullback. It’s difficult to argue against a hot stock in a hot sector, but fast moves often reverse, and offer traders on the other side of the market to enter after a dip.

 

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CNBC.com. Square slips after solid earnings, a week after record close. 11/8/17.

2 Bloomberg.com. Square Eclipses Twitter as Market Value Tops $15 Billion. 11/10/17.