On Wednesday, Square Inc (NYSE:SQ) was able to buck the bearishness in the markets. SQ stock jumped more than 5% to $54.61, hitting a 52-week high.
While the company is growing at a strong clip — powered by its online payments and lending businesses — investors have been mostly focused on the cryptocurrency play. Back in November, SQ allowed users to buy and sell bitcoin from the Cash app.
Even though this is likely to remain a small part of the overall business for some time, it does not seem to matter much. The fact is that SQ stock is one of the few equities to get exposure to the cryptocurrency market.
But this week, we got some other news which ginned up more excitement. Consider that Nomura Instinet analyst Dan Dolev put out a report that reiterated the Square stock price target at $64.
There was also an interesting survey, with the title of “SQ Survey: Merchants Say YES! To Bitcoin.” In it, he noted that 60% of merchants, who were surveyed in the U.S., would be willing to accept bitcoin instead of the U.S. currency.
The conclusion for Dolev based on this finding? Well, he wrote: “Like Amazon in its early days, we believe that little of Square’s future revenue streams are currently visible.”
This is certainly a bold statement. Note that the market cap of Amazon.com, Inc. (NASDAQ:AMZN) is a staggering $770 billion, whereas SQ stock is at $21.6 billion. So yes, if Dolev is proven right, there is a tremendous amount of upside left.
The Square Stock Forecast
There’s little doubt that SQ is a solid company. Back in 2009, Jack Dorsey was prescient in understanding the power of the Apple Inc. (NASDAQ:AAPL) iPhone, and he doubled down on the opportunity.
But he was also smart to make the app intuitive and simplify the fee structure for merchants. What’s more, over the years, Dorsey would go on to leverage the platform, such as by adding new applications for payroll, scheduling, gift cards, invoicing and employee management.
Yet, I still think it’s a stretch to declare that SQ stock is the next Amazon. For one thing, the growth rate is not necessarily impressive. During the latest quarter, Square’s revenues grew 36% to $616 million. Keep in mind that this is not like the levels that Amazon saw in its early days. In fact, for the fourth quarter, the company’s revenues grew faster than Square’s — up 38% to $60.5 billion.
Something else: Square’s core payments business is low margin (the GAAP loss was $15.7 million in the latest quarter, compared to $15.2 million in the same period a year ago).
And yes, this is the same for Amazon’s e-commerce business. But it’s important to keep in mind that Amazon was able to deal with this by creating AWS (Amazon Web Services), which has been a major source of cash flows.
Finally, it’s far from clear that bitcoin will become mainstream. The volatility is gut-wrenching, which is likely to scare away many consumers (it’s not uncommon to see double-digit plunges in a day). There have also been examples of hacks and frauds, as seen with the $70-million NiceHash theft.
Hey, when it comes to bitcoin, there is no FDIC to protect your hard-earned money!
Bottom Line on SQ Stock
The price of SQ stock is already baking in quite a bit of the positive fundamentals — and then some. For the year, the shares have clocked a return of 58%. This puts the price-to-sales ratio at nearly 10X. To put this into perspective, AMZN is at 4.3X.
So if there is another big-time plunge in bitcoin — which seems reasonable — SQ stock could be vulnerable. In other words, unless you are a trader, it’s probably best to avoid this one.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
