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Sep 7, 2018

S3 Analytics: Square Short Squeeze Losing Steam

The drama building behind Square’s levitating share price entered a new phase following a remarkable rise to historic highs in the weeks following a fairly lackluster second quarter report.

Square has been a classic short squeeze, the size of short positions have dropped markedly in the face of a steadily rising stock price. It continues to be the second largest short in the Data Processing & Outsourced Services sector behind Visa (V) and ahead of PayPal (PYPL) and Mastercard (MA)
A lot of the action came around the time for Square’s second quarter report in early August.  Rather than falling on news that profit returns failed to meet analysts’ estimates, Square’s share prices shot to new highs and kept rising on excitement over prospects for higher revenue.

In the third and fourth quarters of this year the number of shares shorted dropped by 9.3 million, or 27%, while the stock price rose by over $28, or 46%.

A bullish analyst report and surges in twitter feeds fueled the price surge. Supporters were waxing on the prospect of Square’s revenue expansion from continued penetration of ultra-small merchant services.

After last month’s capitulation, short interest held steady in the face of the bullish rally—a sign of firm conviction. Total borrowed stock rose to over $2.3 billion over the course of this past month as short sellers stopped buying to cover their short exposure and rode out the rally.

The remaining shorts are betting a lot that they will eventually be proven right. So far this year they have accumulated $1.70 billion in mark-to-market losses. The corresponding average short position in 2018 was $1.8 billion—a 93% loss. Institutional research firm Craig-Hallum based in Minneapolis maintains a $37 price target convinced that 2019 organic revenue will decelerate unable to support current high levels. The culprit: increasing competition from First Data’s Clover service, and dilution from options.

Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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