Don’t Buy Square Stock Until It Proves Itself Worthy (SQ)

Square is a snooze until its ambitious development plans kick in

Square Inc (SQ) stock has been a disappointment since its initial public offering last month and for good reason: Wall Street analysts aren’t all that bullish on SQ.

Don't Buy Square Stock Until It Proves Itself Worthy (SQ)As Jack Dorsey’s latest venture — he co-founded Twitter (TWTR) — the excitement surrounding the Square IPO was only natural. Bubble 2.0 or not, there’s no denying that a select group of tech stocks have carried the market all year. (Notably, TWTR is not among them.)

It’s also true that mobile payments are supposed to be the next big thing.

But it turns out that the Street and the market don’t see why a payments processor should get a premium valuation. They’re right to be skeptical.

As sexy as the mobile side of the equation might be, payments processing is a steady, but low-margin business. Making matters worse, when it comes to mobile payments, SQ is competing in an increasingly crowded industry, one which is populated by some of the biggest names in tech.

Apple (AAPL) is pushing Apple Pay; Alphabet’s Google (GOOGGOOGL) has Android Pay; and PayPal (PYPL), Facebook (FB) and Twitter are all trying to gain traction in mobile payments. Heck, even Walmart (WMT) got into the act with Walmart Pay. (Does this business have any barriers to entry?)

SQ Doesn’t Trade Like a Hot Stock

And remember, in the case of the competition, mobile payments is only of ancillary importance. It’s not like Apple, Google and Facebook are pure plays on mobile payments. SQ is supposed to get around this sentiment because of its ambitions in other businesses, like online lending marketplaces and software-as-service products.

Cloud-based anything is booming these days, but SQ isn’t really there yet. It has big ambitions, but for now, almost all of its revenue comes from payments processing.

Snooze.

And so investors aren’t willing to pay much of a premium for shares. SQ isn’t expected to be profitable for some time, so there’s no way to value the stock on earnings, but other metrics show how skeptical investors remain.

Square stocks changes hands at 1.5 times enterprise value to revenue. Twitter, for comparison, gets a multiple of more than 7. SQ’s price-to-sales is similarly discounted, trading at 1.7 vs. more than 8 for Twitter.

Until Square can prove itself with sexier, higher growth sources of revenue, upside is limited. Analysts’ average price target stands at $13.91. That implies a gain of 10% in the next 12 months or so.

That doesn’t make Square stock a sell, but the Street sure doesn’t see SQ putting up Netflix (NFLX) gains for 2016. Of the 13 analysts covering SQ, 6 call it a “hold.”

True, Square has done well off of its IPO price of $9 a share, but retail investors don’t get the IPO price. What’s more likely is that they bought Square stock on its first day of trading, when it hit a high of $14.75. Shares have lost almost 15% since then.

Bulls point to Square’s impressive road map of non-payments products and services. If it can execute on those ambitions — yes, absolutely — you can bet the market will reward it with multiple expansion.

But that’s a big “if.” Square is going to have to deliver on its development plans before the bears back off. Until then, this stock remains a “hold” at best.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/square-sq-stock-ipo/.

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