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Should You Buy Square Inc (SQ) Stock? 3 Pros, 3 Cons

SQ stock has rounded up some real momentum lately, but don't overlook these key risks

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Jack Dorsey’s fortunes have diverged. His social media platform, Twitter Inc (NYSE:TWTR) continues to lose large quantities of money. TWTR stock sits 75% off all-time highs and not all that far from new 52-week lows. However, Dorsey’s other publicly-traded company, Square Inc (NYSE:SQ), has moved in the other direction.

SQ stock has rocketed back up after a bumpy 2016. Shares trade near new all-time highs. Analyst upgrades, a strong recent quarter and expansion of ancillary services are all getting investors excited. But, there are still plenty of risks in SQ stock. Should investors ring the register on this payments play now?

SQ Stock Cons

Jack Dorsey Is a Busy Man: There’s a difference between being a great entrepreneur and a great executive. They seem like similar roles, but the needed skills are actually quite divergent. A business founder needs to have vision, see things others don’t, find an untapped consumer need and deliver something creative to fill the void. There world needs great thinkers to solve these sorts of problems. Jack Dorsey is such a man and he’s proven to have the vision for this sort of role.

However, once the company is off the ground, you have to switch into an executive role. And Dorsey has struggled with that previously. He was once forced out as Twitter’s CEO. According to the book Hatching Twitter, Dorsey was a poor manager, focused too much on his hobbies, handled criticism poorly and sowed seeds of internal division. He eventually returned to Twitter, but the performance of TWTR stock has been less than impressive since then.

So, it’s worth considering if Dorsey is fit to be Square’s CEO. Additionally, Dorsey has plenty on his table (hobbies and other distractions aside). He is CEO of two large publicly-listed companies, along with being on Walt Disney Co’s (NYSE:DIS) board. It’s a lot to ask from someone whose previous managerial work hasn’t been particularly superb.

Credit Risk: The attraction of a business like Visa Inc (NYSE:V) is that it takes minimal credit risk. Taking a cut of every payment that goes through, it’s safe and stable. Square, by contrast, does not have such a low-risk model.

Yes, the company makes some money on payment processing, but not enough, it would appear, to be profitable. Instead, it is relying on ancillary services such as Square Capital to make the business model work. See the pros below. That’s fine, but it comes with more operational risk. The sorts of companies Square lends to tend to fail frequently; most small shops or restaurants don’t survive more than a few years. Square can diversify this, to some extent, across thousands of loans.

However, if the economy turns down, Square’s loan performance would almost certainly suffer. Small business simply doesn’t tend to be recession-resistant. Further, other Square services, such as the food delivery business, would likely suffer significant loss of momentum in a recession. Despite appearing diversified, Square has a lot of exposure to credit risk and the economic cycle.

SQ Stock Is Expensive: SQ stock is trading near all-time highs. SQ stock has briefly topped $15 on a few occasions, but has always fallen back. The stock appears to be making another technical double top off that level now. In the past, SQ stock fell from $13 to $9 following the IPO, then from $15 back to $9 last year. If it can’t get past $15 this time, either, volatility could send Square stock lower in a hurry.

At today’s price, SQ looks quite expensive, and it looks even worse the more you inspect things. As of the last filing, there appeared to be 352 million shares of outstanding SQ stock. However, add in all the stock options used for employee compensation, and the real share count balloons out to almost 450 million. The company is using stock heavily to pay employees.

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Article printed from InvestorPlace Media,

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