Square Inc (NASDAQ:SQ) CEO Jack Dorsey was welcomed like a conquering hero to the Consensus 2018 Bitcoin conference this week. The event at the New York Hilton drew 8,400 people at $2,000 per ticket, and Dorsey’s decision to support Bitcoin in Square’s Cash app was the star of the show. This news has been very good for Square stock.
The news, however, has not been so good for Bitcoin. Since the start of the year Bitcoin prices have fallen from over $13,400 to less than $8,400 per coin. Square stock, by contrast, is up 56%.
Dorsey got love despite admitting his original plan to treat Bitcoin as cash hasn’t worked. His Cash mobile app will let you buy Bitcoin or sell it , but you can’t buy a pizza with Bitcoin in the app because the transaction costs are too high.
The Square Bubble
In its first quarter report, Square said it took in $34.1 million from Bitcoin trades. Sounds great, but it spent $33.9 million handling the trades.
Dorsey told the conference using Bitcoin as currency would give Square a global platform, since Bitcoin is traded at the same price around the world. He said the internet will have a “native currency” in time but said he didn’t know if it will be Bitcoin or something else. He drew cheers anyway.
While Square hasn’t pumped up the Bitcoin bubble, it is possible its participation in the cryptocurrency market has revealed a Square bubble. Citron Research, which produces reports for short sellers, recently called it “a collection of yawn businesses” and put a $30 target price on the stock. The shares were slated to open on May 17 at $56.75 each.
At that price you’re paying about 10 times last year’s revenues for the shares, and let’s not talk price to earnings ratios because Square isn’t profitable. By way of comparison Visa Inc (NYSE:V) sells at 15 times revenue, but has a PE of 33 because it brings almost 40% of revenue to the bottom line and pays 84 cents per share in dividends.
A Payments Bubble?
I have written before that payment processors are part of a market bubble that could pop, but it hasn’t yet. Paypal Holdings Inc (NASDAQ:PYPL), which I profiled in terms of that bubble last July, has since risen 32%.
Square stock, on the other hand, is up 114% since that story came out.
Many find Square to be more than a payment processor, because it has reached new markets with its mobile phone dongle, its one-size fits most pricing and its ancillary services, including accounting and loans.
The micro businesses that Square targeted also don’t seem to abandon it as they grow. I wrote about one such customer for TheStreet.com in 2013 , a local doughnut shop near my home. The shop now has two outlets, still has lines out the door on weekends, and it also still uses Square.
The Bottom Line on Square Stock
To keep people buying the stock, Square needs to keep generating big growth with bigger numbers. Its first quarter report saw adjusted revenues up 51% year over year, with 20% of customers now processing over $500,000 per year each.
Keeping up the growth pace over the next year would still leave it at less than half the size of Total System Services, Inc. (NYSE:TSS), a traditional merchants processor that brought 26% of $1.273 billion in revenue to its net income line for the December quarter, and achieved 20% year over year growth.
Square’s market cap opening for trade May 17 was $22.7 billion, TSS’ $15.6 billion. Your choice.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.