“Network Effects” Stocks Sea And Square (Block) Are Dumped Big-Time

We used to call these “story stocks.”

This referred to a kind of company that floated upward mainly on the expectation that a fabulous story underlying the stock could lead to continuous hyper-growth forever. Sea Limited and Square

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(now Block) qualified under the exciting hot concept of “network effects.” At least, they used to.

Without getting into the details of exactly what that meant — something about the increasing value of an online platform as the number of users keep increasing — here are price charts showing the decreasing value of 2 of the most watched recent efforts in the space.

The Sea Limited weekly price chart looks like this:

That dotted red line connecting the mid-November high with the early December high is not quite straight down but it comes pretty close for a stock chart. Since the mid-October peak up at above 370, investors have piled out of Sea as if it has some type of virus variant.

That’s a 45% drop in about 2 months time. Note that the price is now below both the 50-day moving average and the 200-day moving average. You can see how the 50-dma is now trending downward. Take a look at those big red volume bars near the bottom of the chart. Sea is all the way back to the lows of May at 205.

Here’s the Sea Limited weekly price chart:

All of the so-called “network effects” hyper-growth from early 2019 to September/October of this year is being called into question. You can see with greater clarity how dramatically this stock has tanked in the 4th quarter. It’s plunged below the 50-week moving average like a hot knife through butter.

If you purchased Sea in October after hearing from an investment advisor that “network effects” stocks were definitely the absolute best thing ever, you might want to have a long talk with that advisor. The company is testing the March, 2020 coronavirus pandemic lows.

This is the daily price chart for Square, now known as Block:

This is the company that Jack Dorsey is now running exclusively, have given up his dual CEO position over at Twitter. This one peaked on big buying volume in late July and early August. After that burst of investor enthusiasm, Square began a steady descent that continues today.

It peaked at $290/share and is now worth $158share for a steep 45% drop in only about 5 months. The stock touted as a “network effects” hyper-growth number is now trading below both significant moving averages and has dropped to below the May lows at about 192.

The weekly price chart for Square (now Block) looks like this:

Observant price chart analysts could see the negative divergences forming on the relative strength indicator (RSI, above the chart) and on the moving average convergence/divergence indicator (MACD, below the chart). This type of look is not a bullish pattern, typically.

The stock presently trades below its down trending 50-week moving average and appears to be headed for a test of the much lower 200-week moving average. Now that Jack Dorsey is devoting his full attention to this one company, will things change? If you still own it, that’s a good question.

During this same period, old-school stocks without “network effects” continued to hit higher highs: Procter and Gamble

PG
, for example, benefitting from the sale of toothpaste and other consumer products not necessarily networked on internet platforms. And definitely not a “story stock” as such.

Not investment advice. For educational purposes only. Always consult with a registered investment advisor before making any decisions.