Square Inc (NYSE:SQ) has finally rounded the corner. The company went public in late 2015 around $12 per share. SQ stock then proceeded to do absolutely nothing for the next year, fluctuating between the high single digits and $15/share.
That all changed in 2017 though. Square CEO Jack Dorsey — also the embattled co-founder of Twitter Inc (NYSE:TWTR) — found his Wall Street redemption. SQ stock launched as high as $48 over this past year. The company shook off major client losses and posted huge revenue gains. The push into merchant lending appears to be going well. A bitcoin offering accelerated the company’s stock price gains.
Now, SQ stock has dropped 30% off its recent highs. Is the party over? Or is it time to buy the dip?
SQ Stock Cons
Can It Scale?: Square’s recent transaction growth is highly encouraging. It is helping to reverse some serious negative sentiment about the viability of Square’s business model. Don’t forget, investors left the company for dead in 2016, with shares trading as low as $10.
Starbucks Corporation (NASDAQ:SBUX) abandoned its partnership with Square. It became clear that Starbucks needed a more sophisticated offering, and it also demanded lower transaction fees. Square has gone back to its roots, focusing more on smaller retailers. However, like PayPal Holdings Inc (NASDAQ:PYPL) in its early days, Square eventually needs to prove it can handle larger customers effectively.
Where’s The Moat?: Square has a big issue in the longer run. What can it do differently to protect its business from new competitors? Hardware can be easily copied. And if Square’s growth continues strongly, it will serve as a beacon to attract competitors willing to undercut them on processing costs.
Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) have dominated the payments sector for years. Whether the competitors are other cards such as Discover Financial Services (NYSE:DFS) or other payment technologies, few have taken serious market share. Sure, the occasional PayPal can succeed, but countless other innovators have been snuffed out along the way.
Square is making moves into other markets. Caviar, for example, delivers food. It could have success, but the market is already crowded. Square is also moving aggressively into small-business lending by offering funds for its merchants. This is potentially high-margin, but comes with risk, and puts them in competition with leading global financial institutions.
At this point, it’s still not clear what Square’s lasting edge will be.
Bitcoin Integration: Square recently decided to start allowing its customers to start buying bitcoins.
This is potentially a positive — see below.
But it also comes with risk. Square is an alternative payments solution. Cryptocurrencies are alternative means of making payments. It’s unclear what function Square would serve in a world where merchants start accepting bitcoins and other such cryptos in mass. Square, as a middleman, is promoting a service that could ultimately replace it. To be clear, there are serious roadblocks to widespread merchant adoption of cryptocurrencies. Due to the volatility of cryptocurrency prices, it is unlikely that widespread acceptance would happen any time soon. That said, it seems to be courting trouble for Square to promote crypto-adoption in retail seriously.
SQ Stock Pros
Bitcoin Integration: Yes, this is both a plus and a minus for SQ stock. How does that work? While there are clearly risks to integrating with a potential rival like bitcoin, for now, it brings Square some real positives as well.
Paul Condra of Credit Suisse said it well: “Given Square’s tendency to move judiciously into new technologies, we expect it will do the same with bitcoin purchases […] The upside could be significant if cryptocurrencies become more mainstream.” So far, few mainstream trustworthy companies have enabled people to buy bitcoins easily. There’s big upside for SQ stock if it can supplant sketchy bitcoin exchanges for a decent chunk of the crypto market.
Investors clearly cheered the move. SQ stock was trading around $40 when they announced bitcoin integration. Shares rallied hard on the news, hitting their all-time high of $49 just a week later.
Analyst Enthusiasm: SQ stock is picking up a lot of institutional support in addition to the Credit Suisse comments above. Ramsey Al-Assel, of Jeffries, declared earlier in the month that Square’s bitcoin service should appeal to consumers. He continues to view SQ stock as a buy. Keybanc’s Josh Beck is also bullish on the stock. He lifted his price target earlier this quarter, and reported that Keybanc research found that 80% of large merchants on the platform plan on sticking with Square, even though the majority were offered lower payment processing rates elsewhere.
Dan Dolev, of Nomura, went farther yet. He is highly bullish on Square’s continued move into credit. He views Square as a “major disruptor” that can shake up lending to merchants. In his view, banks have not adequately serviced this niche, and Dolev potentially sees Square obtaining a banking license and taking more market share in this field. He recently raised his price target on SQ stock and is now looking for $48/share.
Big Quarter: SQ stock appeared stuck in a real funk after Starbucks pulled out of Square’s platform. And yet, the company keeps delivering within its key small merchants market.
Payment volume for the most recent quarter rose 31%, while adjusted revenues surged almost 50%. Adjusted EBITDA almost tripled versus the same point last year. Square appears to be hitting the level of scale where incremental revenues start turning into real profits and cash flow quickly. The company also raised revenue and profit margin guidance for the year.
Verdict
Square, the business, had a good year. SQ stock, on the other hand, knocked it out of the park. Unfortunately for SQ stock bulls, you’re likely to see more correction ahead as fundamentals still need to catch up with the stock’s recent huge run.
There’s potentially more long-term upside in SQ stock, but in 2018, look for the real risks to Square to outweigh investors’ optimism on bitcoin integration and other such factors.
At the time of this writing, the author owned DFS stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.
