Even though tech stocks have come under pressure lately, Square (NYSE:SQ) stock has been unaffected by that trend. The company remains a red-hot momentum play. During the past year, Square stock has generated a sizzling return of 242%.
The excitement about SQ stock is certainly based on solid fundamentals. The company is one of the pioneers of the financial technology revolution. Back in 2009, Square founders Jim McKelvey and Twitter’s (NYSE:TWTR) Jack Dorsey saw the potential of Apple’s (NASDAQ:AAPL) iPhone. So they built a connector that allowed people to easily swipe credit cards using their iPhones.
McKelvey and Dorsey did not stop there. Over the years, they continued to innovate the platform, adding a myriad of services like invoices, e-commerce, gift cards, payroll, employee management, inventory, scheduling, etc.
But perhaps the most important offering – which has been a key for Square stock – is its Cash App, which is a peer-to-peer payments service. Last quarter, users transferred about $250 million with it. Keep in mind that a report from Japanese bank Nomura indicates that the app is growing faster then Venmo, which is operated by PayPal (NASDAQ:PYPL).
According to InvestorPlace.com’s James Brumley: “But, Square has largely foreseen this paradigm shift and correctly predicted what consumers and small business would (and wouldn’t) want. Mostly, consumers and small proprietors just want buying and selling to work so well that they don’t even notice the process.”
All of this is certainly great. But when it comes to Square stock, I think investors should utilize some healthy skepticism.
First of all, Square’s competition is getting more intense. After all, the opportunity is very juicy.
And the competition is not just coming from pure-tech players like Intuit (NASDAQ:INTU). Traditional financial institutions are also getting much more aggressive with their tech innovations. Just look at Zelle, which is a person-to-person payments app. It has the backing of Bank of America (NYSE:BAC), BB&T (NYSE:BBT), Capital One (NYSE:COF), JPMorgan (NYSE:JPM), PNC Bank (NYSE:PNC), US Bank (NYSE:USB) and Wells Fargo (NYSE:WFC). With this scale, the Zelle app has gotten quite a bit of traction. During the second quarter, the app’s payment volume reached $28 billion, and 100 million transactions were carried out on the app.
Furthermore, PYPL is fighting hard as well. In May, the company paid $2.2 billion for iZettle AB, which operates a leading online merchant platform in Europe. The deal is a major shot at Square.
Bottom Line on Square Stock
When it comes to SQ stock, there are also some technical factors to consider.
One is that the shares have been a favorite target of short sellers. If Square stock does not drop meaningfully, it may benefit from a short squeeze, which occurs when short sellers buy back shares in order to terminate their positions.
It looks like Square stock has benefited from short squeezes in the past. But according to S3 Partners, it appears that this trend is starting to diminish. If anything, it seems that the short sellers are even more convinced of their bear case.
And finally, the valuation of SQ stock is certainly high. Consider that the forward price-earnings ratio of Square stock stands at 114. By comparison, PYPL only has a price-earnings multiple of 31.
In other words, the expectations for Square stock are at lofty levels, meaning that if the company’s results come in slightly below expectations, the shares could be vulnerable. So all in all, it’s probably best to hold off on buying Square stock for now.
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.
