3 Reasons to Be Cautious About Square Inc Stock

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SQ stock - 3 Reasons to Be Cautious About Square Inc Stock

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When Square Inc (NYSE:SQ) went public in late 2015, Wall Street was not impressed. The company priced its shares at $9 each, which was below the initial $11-to-$13 price range. But, of course, things are much different now with the SQ stock price.

3 Reasons to Be Cautious About Square Inc (SQ) Stock

It is one of the best performers of the year, with a sizzling return of 233%!

A key factor is that the company has continued to innovate. For example, it has expanded into areas like lending, payroll, e-commerce, home delivery, gift cards and employee management. Oh, and SQ has recently made a move into the wild bitcoin market.

As a result, SQ has seen consistently strong growth. During the latest quarter, the gross payment volume jumped 39% to $13.2 billion.

All this is great, right?

Definitely. But, then again, it seems as though much of the good news is already baked into the stock — and then some. Hence, investors probably should be more cautious now with SQ stock.

So here’s a look at 3 reasons why:

Risk #1 With SQ Stock: Balance Sheet

SQ is actually in the process of getting a bank charter. This will allow the company to provide its customers the ability to deposit money, which will provide more convenience. What’s more, the liberalization of banking regulations under the Trump administration is another advantage.

But the strategy is not without its potential downsides. Keep in mind that SQ plans to focus its lending on smaller businesses, which are much more vulnerable to problems. Here’s what SQ’s head of lending, Jacqueline Reses, recently noted: “Over 67% of our [customers] can’t get financing anywhere. And so we are their sole source of financing. … We think that enables us to serve an underserved market in a way that very few others have.”

And while its true that the company has a valuable set of data, it still has not been tested in a recession. All in all, the SQ stock price could be in serious jeopardy if there is a spike in loan losses.

Risk #2 With SQ Stock: Moat

SQ has definitely disrupted the traditional credit card processing market. The company was savvy in simplifying the fee structure, leveraging mobile devices from Apple Inc. (NASDAQ:AAPL) and Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) Android, and developing intuitive interfaces.

But such advantages are not necessarily sustainable competitive advantages. The fact is that rivals like Intuit Inc. (NASDAQ:INTU) and Paypal Holdings Inc (NASDAQ:PYPL) have tremendous engineering and design talent as well. These companies also have the benefit of enormous user bases.

Besides, SQ is moving into other categories that are intensely competitive. A prime example is the company’s Cash app, which is going after the PayPaly’s highly popular Venmo offering.

Risk #3 With SQ Stock: Valuation

Despite its scale, SQ has not shown much operating leverage. During the latest quarter, there was a GAAP net loss of $32 million. It’s also important to note that 87% of revenues come from credit card transactions. This is essentially a commodity business that sports low margins.

True, on a forward basis — in terms of adjusted numbers — there will be positive earnings. Yet, they will still be fairly minimal. In fact, the price-to-earnings multiple for the next 12 months is expected to be a hefty 100.

For the most part, it seems that Wall Street has already baked in much of the good news on SQ stock. So if the competitive environment continues to get tougher — which seems reasonable — and there are challenges with the various new businesses, SQ stock could be in jeopardy.

In other words, it’s probably best to wait for a better valuation.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/3-reasons-cautious-square-stock/.

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