Congratulations to anyone who had the wisdom and/or guts to stick with their Square Inc (NYSE:SQ) position through and since last week’s earnings report. Now get out.
Although the immediate response to the so-so fourth quarter was anything but thrilling, Square stock took off on Monday, gaining nearly 10%. The move is suspicious at best and unfurled for all the wrong reasons.
That’s an idea sure to ruffle the feathers of many fans and owners of the stock, who admittedly have done quite well by jumping on board the rocket ride. The SQ stock price tripled last year, and Oppenheimer’s Ari Wald just said there’s room for more upside. And, maybe there is.
There’s also a time to call a spade a spade though, and like it or not, the latest leg of the move is just more of the stock market silliness that’s seemed to accompany bitcoin since it became all the rage a little over a year ago.
Any Reason Will Do
Yes, yes … I can already hear the pushback. Cryptocurrencies are the future. Physical cash is going away. Unregulated currency will become the new norm. Digital wallets. Blah, blah, blah.
I don’t disagree with many of those tenets. I have to disagree with the idea, though, that somehow the entire world didn’t hear until this weekend what Square CEO Jack Dorsey said last Tuesday. That is, “bitcoin, for us, is not stopping at buying and selling.”
It’s not entirely clear what that was supposed to mean, but by and large, it was interpreted as a sign that either Square would somehow become a de facto Bitcoin exchange, or that adding Bitcoin to the mix would cause an even more rapid adoption of Square as a payments middleman.
The curious part? There was no new news to prod Monday’s surge.
Actually, that’s not exactly true. The timing of the big jump from Square stock coincides with a Square/Bitcoin article posted at Latvian-based website Cryptona. Still, there was nothing in that commentary that investors wouldn’t have already known… not that they really knew a lot.
The only other detail Dorsey added to the mix during last week’s conference call regarding bitcoin wasn’t actually a detail. He explained, “We do believe that this is a transformational technology for our industry, and we want to learn as quickly as possible.” That’s still not a lot to go on.
We’ve Seen This Before
If this kind of ambiguous bitcoin bullishness seems familiar, there’s a reason. We’ve seen it before.
Remember back in late December when Riot Blockchain Inc (NASDAQ:RIOT) rallied roughly 300% because it announced it was getting “into” the blockchain business? Just three months earlier it was a biotech stock called BiOptix. Just a few days prior, iced tea company Long Island Iced Tea Company became Long Blockchain Corp (NASDAQ:LTEA). Investors poured in, without even really knowing what they were pouring into, tripling the stock’s value.
In its defense, Square’s foray into the world of cryptocurrency isn’t nearly as ridiculous. Heck, it’s even advisable, and Dorsey clearly isn’t merely looking to jump into a fad to raise funds and pump up the stock’s price; changing your company’s name just so it includes the word “blockchain” is a painfully obvious ploy. Dorsey also acknowledges Square’s foray into bitcoin is more of a developmental experiment.
The issue is with traders is the “buy first and ask questions” later mindset. The fact that a relatively unknown Latvian website can whip up a bullish frenzy on non-news is a testament to just how unhinged the bitcoin craze still is.
It’s a problem, simply because these hollow flash-in-the-pan rallies can fade as quickly as they develop. Never even mind the fact that bitcoin prices look like they’re rolling over again, resuming a steep downtrend that ultimately cut its value in half between December and February. The weaker it gets, the less attractive it becomes as it reminds would-be users that any means of conveying monetary value must first and foremost be stable. bitcoin is anything but, potentially throwing a wrench in Square’s ambition.
Bottom Line on Square Stock
To be clear, this isn’t an indictment of Square as a company. I’ve long been a fan of what the company does, cheering the fact that it provides a service to small business that major credit card players like Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) blew off. Big mistake.
I’m also a fan of how the company is looking to make loans that local banks didn’t care to make. Small business in the United States account for about $1 trillion worth of loans.
Rather, this is just an acknowledgment of the insanity that the advent of bitcoin has created, and the subsequent risk it poses to even legitimate equities like Square stock. Traders that jump on every trend sight-unseen can and usually do bail out just as quickly, and a huge chunk of the SQ stock rally since this time last year was bitcoin-driven. That piper is apt to be paid sooner or later.
More important, yes, that tumble would be a buying opportunity for investors that want to tap into Square’s actual fundamentals, which continue to look better and better.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.