Should Investors Heed the Warnings on Square Inc Stock?

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As much as investors and analysts hate Twitter Inc (NYSE:TWTR) in 2017, that’s how much they love Square Inc (NYSE:SQ). They are mentioned in the same sentence because the same man, 40-year-old Jack Dorsey, is CEO of both TWTR and SQ stock.

 

Should Investors Heed the Warnings on SQ Stock?

The two headquarters are located just a block apart along Market Street in San Francisco, but it’s a real Tale of Two Cities situation. It’s the worst of times for Twitter, which trades at a fraction of what it fetched when it went public in 2013. But it’s the best of times for Square stock, up 156% since its 2015 debut.

Square is a payment processor with a niche in small business, offering a set rate on credit and debit transactions, using mobile phones as a terminal. With a market cap of $12.62 billion, it sells for more than six times its 2016 revenue of $1.7 billion.

The Secret Is the Data

Square sells at a premium compared with other merchant processors such as Total System Services, Inc. (NYSE:TSS) because the mobile interface and its data collection allow it to sell a host of other services to its merchant customers. The one that most excites analysts is Square Capital, its lending arm.

Square is expanding its service base with partnerships, even selling services to companies that don’t use its processing platform.

These services have given analysts sugarplum visions, with half now giving it a buy rating.  But most processors now offer additional services that lock in customer accounts. What should matter is the platform, which in the case of Square stock, delivered revenue growth of 34% in 2016.

That growth rate is slowing, however, as the niche gets filled. Analysts are looking at revenue of $569 million for the September quarter, which will be reported November 8.  That’s not much more than the $551 million achieved in June, but analysts are also expecting a profit of 5 cents per share, and whispering about 7 cents.

That would be big news, because Square has not made money before. But even if it’s sustained for a year, that’s 28 cents per share of profit when the SQ stock price is $33, a forward price to earnings multiple of 118. At current prices, investors are buying growth, and growth is slowing.

Watch Out Below

This may be why InvestorPlace writers are mostly warning investors out of SQ stock, even while other analysts are saying buy, buy, buy.

Laura Hoy writes that now is not the time to buy SQ stock and that its potential is already priced in. Vince Martin agrees, saying the stock has gone too far, too fast.  Bret Kenwell writes that it is time for the shares to correct, and he recently shorted Square.

Only Luke Lango remains bullish, believing Square’s mobile technology will grow revenue at over 20% per year indefinitely.

Bottom Line on SQ Stock

My own view is that processors are overvalued. Visa Inc (NYSE:V), for instance, is profitable but sports a price to earnings ratio of over 40 and is worth over 10 times its sales, double the price to sales ratio of even Square. Other processors, like Vantiv Inc (NYSE:VNTV) and Mastercard Inc (NYSE:MA), have also been running hot, with Mastercard alone up 43% in the last year.

The merchant side of processing transactions has become a gold mine, but it may be peaking with the rise of new fintech applications built on blockchain, which have the potential to take banks out of the equation entirely. That won’t happen right away; it’s just potential right now. But with processor stock prices this high, even a potential threat could burst their bubble.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/square-inc-sq-stock-warnings/.

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