Square (SQ) was one of the more hyped IPOs of the year, in part because of its growth, but also because investors are anxious to see whether CEO Jack Dorsey can successfully run both it and Twitter (TWTR).
In Square’s prospectus, it stated some really big numbers, showcasing a massive addressable market.
And while investors may be compelled to buy SQ stock right now, when it’s down more than 7% since its opening IPO trade, there are nearly 300 million reasons why that would be a bad idea.
Actually, 295.9 Million Reasons to Avoid SQ Stock
SQ offered just 27 million shares of Square stock to the market on its IPO. The problem is that there are another 295.9 million shares that could theoretically be dumped in the market after May 17 of next year.
That May date is the lockup expiration for Square stock, and up until that time, insiders and other early SQ stock investors are unable to sell their holdings. However, the size of Square’s lockup expiration casts an incredible amount of doubt and speculation on SQ stock, as investors will question how many of those shares will be sold, thereby creating selling pressure.
Naturally, when there are more sellers than buyers, a stock falls. With Square stock, there is the potential for a huge degree of selling pressure following this lockup expiration, and it’s this risk that will keep SQ from trading with too much positive momentum up until that time.
It is worth noting that 13 officers and directors own approximately 55.4% of these shares, with the remaining stock held by institutions and other investment firms.
In looking at the competitive landscape for Square, the market has changed drastically since many of these early investors bought into Square stock. So, investors should not be surprised if many are looking to make an early exit at that lockup expiration date.
What About the Market Landscape for SQ Stock
Square creates nearly all of its revenue from point-of-sales (POS) services. During the first six months of this year, it generated more than $560 million in revenue, growth of more than 50% year-over-year, from gross payment volume of $23.8 billion.
This all looks great, but it is important to keep in mind how drastically the POS and mobile-payments industry has changed in the last year alone.
Square is a six-year-old company, and for most of its life the only real competition has been PayPal (PYPL). Nowadays, there’s Apple‘s (AAPL) Apple Pay, Alphabet‘s (GOOG, GOOGL) Android Pay, Amazon‘s (AMZN) Amazon Payments and Samsung‘s (SSNLF) Samsung Pay, as well as competing services from MasterCard (MA) and Visa (V) that are performing very well.
In other words, the POS landscape has changed, and while Square maintains an impressive growth rate, it is spending money ferociously to maintain that clip.
During Square’s last quarter, its operating expenses of $384.4 million grew at the same rate as revenue. This increased spending is keeping the company from being profitable in what should be a very lucrative industry. SQ has an operating margin over the last year of negative 10%. In comparison, PayPal has an operating margin over 16%.
No Reason to Buy Square Stock
All things considered, SQ is growing fast, and may have an addressable market of 30 million businesses, but the problem is that Square has to share this market with all those competitors who also have much larger ecosystems in place.
Over the course of a number of years, this competition is a major threat, but before that, SQ stock must overcome the increased selling pressure that could come after its lockup expiration.
Given the number of shares that institutions and insiders still have to sell, coupled with these threats, investors should expect Square stock to go much lower.
As of this writing, Brian Nichols owned shares of AAPL.