Square Inc (NYSE:SQ) is on the move. With the recent growth in SQ stock and the revenues and earnings coming in above expectations, everyone appears to want in on the action.

Unfortunately for those who want to buy, the stock has been run up to a high level. With this high valuation and a shrinking moat, the stock remains priced for perfection and risky for new investors.

SQ remains a great company

I feel a great deal of reluctance in telling buyers to stay away. As a business, I love Square. As I pointed out in previous articles, some companies lack a raison d’être, or reason for being. SQ has no such issue.

Because of SQ, credit card transactions, once the domain of larger businesses, can now be conducted by anyone who has a smartphone.

As our own Laura Hoy points out, small businesses that operate out of stalls, home businesses, and delivery guys now can process credit card transactions as if they’re larger businesses.

Also, in SQ’s fight for survival, one key aspect of history has repeated itself. During the 1990s tech boom, people feared Microsoft Corporation (NASDAQ:MSFT) would control all things related to software.

However, a tiny company called Intuit Inc. (NASDAQ:INTU) carved out a niche with a financial management software called Quicken.

Microsoft responded by producing Microsoft Money with the intent of forcing Intuit aside in the same manner that Netscape Communications lost its dominance in internet browsers.

Despite Microsoft’s much larger size, consumers weren’t prepared to trust Microsoft with their money, and Quicken has to this day remained the financial software of choice.

In this respect, Square is the next Intuit. And SQ claimed this position by building a customer base that competing companies such as Paypal Holdings Inc (NASDAQ:PYPL) or large companies such as Amazon.com, Inc. (NASDAQ:AMZN) initially did not pursue.

As Lucas Hahn points out, Amazon intended to take over this space with Amazon Register. Like Microsoft before them, Amazon failed to defeat a much smaller competitor on the financial software front and closed Amazon Register within a year.

Square has made moves to diversify

While SQ relies heavily on credit card processing, it has moved to diversify its business. The company has expanded beyond the one-man shops it targeted originally.

It has aimed for larger businesses with Square Register, a $999 device that includes all the hardware and software needed for processing transactions.

SQ also announced a venture related to bitcoin. It is rolling out a new option that eventually will enable customers to buy and sell bitcoin, although this system does not process bitcoin transactions.

However, despite these offerings and other ventures, 87% of its business remains credit card transactions.

For those who’ve held the equity for over a year, the stock has delivered impressive returns, particularly after the last earnings report where it beat expectations.

Mired in the single digits as late as May 2016, the SQ stock price now stands in the low 40s. Many think the growth will continue. I’m less inclined to bet on it.

SQ stock priced for perfection

Although analysts expect the stock to reach profitability next year, the 1-cent per share profit takes the price-to-earnings (PE) ratio to over 40,000 measured against current levels.

Even with 2020’s expected profit of 40 cents, that measures to a PE of about 100 at today’s price.

Additionally, while SQ may hold market leadership in this industry, competitors such as PayPal Here, Spark Pay, and Intuit GoPayment thin Square’s moat.

The ancillary businesses and its venture to buy and sell bitcoin may widen that moat somewhat. However, small ventures that want to process credit card transactions have other choices.

Although the company has a valuable, specific mission for small businesses, SQ stock remains priced for perfection for stock investors. Square gave the world a valuable resource with credit card transactions for all.

However, with the stock trading at about 100 times expected 2020 earnings, valuations leave no cushion for bad news.

Adding to the danger is the fact that many competitors have emerged. With nearly all of its revenue derived from credit card transactions, the moat remains thin.

Perhaps the bitcoin ventures and other new business lines will widen the moat. And in the future, valuation metrics will likely move to a level where SQ stock again becomes a buy. But for now, investors are probably best off looking elsewhere for gains.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.