Square (SQ) on a Tear

by Dan September 26, 2018 1:29 pm • Trade Ideas

Shares of Square (SQ) are up a whopping 175% this year, making a new all-time high, up about 1000% from its late 2015 IPO, and nearly sporting a $40 billion market cap. This is truly extraordinary for a company that last year booked a tad less than $1 billion in sales in 2017, lost money on a gaap basis to do so ($63 million net income loss on a GAAP basis). SQ trades at a whopping 25x expected 2018 sales of $1.54 billion, which are actually accelerating to 57% growth from last year’s 43%. The stock is clearly a market darling with an analyst from Nomura Securities yesterday suggesting that it should be added to the FANG acronym (read and watch CNBC interview here).

Aside from the FANG’S‘call yesterday, what got me thinking about SQ was an interview that the I saw in person last week at the Code Commerce conference in NYC with Recode’s Jason Del Rey and SQ’s CFO Sarah Friar.

What’s fairly clear to me, after meeting Friar in late 2016, and seeing her at other conferences and on programs like Jim Cramer’s Mad Money (watch here and here) that Ms. Friar has to be on the short list for just about every tech CEO job opening. Oh, and if SQ CEO / Founder Jack Dorsey wants to keep her he will have to make her CEO, relinquishing the helm. And wouldn’t it be a great time to do this as SQ is about to kiss $100 a share, up from its November 2015 IPO price of $9 and refocus all of his attention back to Twitter?? And TWTR could use Jack’s full attention as the company is clearly in the crosshairs of regulators for their failure to combat bad actors on their platform during the 2016 election. And TWTR’s 40% decline from its June highs might suggest that investors are bracing for a sort of guidance reset when they report Q3 earnings in late October that could send the stock roundtripping its entire 2018 move back towards the mid to low $20s. Jack has already been called before Congress and at some point very soon if they are to show slowing user engagement, user growth which will result in slower sales growth and lower profitability, then investors might demand Jack’s full attention. But I’ll save the TWTR trade ideas for another post as we get closer to earnings.

On the SQ front, the question is how much of a Jack Dorsey premium is in the stock at $95? I have no idea, but I think it is safe to assume there is some. But if Jack were to go back to TWTR for 100% of his time (but remain on SQ’s board) then some investors might speculate the company would become takeover bait. I suspect part of the deal to keep Friar as CEO would also include an agreement that she would have at least a year to run the company on her own.

If I were long SQ stock, and have enjoyed much of the 2018 gains, and considering taking some profits, but looking to hold out to sell until 2019 to avoid a large tax liability this year I might consider a collar where I could participate on further upside, to a point, but also have defined risk to the downside, I might consider collaring my stock. For instance…

vs 100 shares of SQ long at $94.50 buy the Jan19 125 / 75 for even money

-Sell to open 1 Jan19 125 call at $2.60

-Buy to open 1 Jan19 75 put for $2.60

Break-even on Jan expiration:

Profits of the stock up to 30.50 between current levels and the short call strike of $125. Profits capped above $125.

Losses of the stock up to $20 down to $75, protected below.

Rationale: it is worth noting that you can sell a $30 out of the money call for the same amount of premium that you can buy a $20 out of the money put. This is a fairly unique opportunity where options prices are skewed to being more expensive for upside calls than downside puts, telling you where investors for the money see the prospects for SQ.

I want to make another very important point for investors who use good till cancel sell orders for stocks they own. When they do that they are saying they are willing to sell their stock at a certain price by a certain point in time. If you place good till cancel orders, it makes sense to consider overwriting your stock by selling a call. It is just that an option if the stock were to go through the short call strike the investor could always cover the short call to keep the long stock position in place. This would not be the case for a good to cancel order, if you have it out there, and it gets elected, your stock is gone, at least this way you have the option (pun intended). And I’ll take this a step further, if you consider overwriting long stock then you can take the next step when consider defining one’s risk by using the call sale proceeds to finance the purchase of a put, like the hedge idea detailed above.