Square (NASDAQ:SQ) is a highly innovative company that has shaken up merchant processing by adding a host of other services small businesses need. Square is growing fast, and to some that makes selling pressure a buying opportunity. SQ stock is down 9.3% for the month, versus a 2.4% decline in the S&P 500 index.
Never mind that it’s as allergic to profit as a hay fever sufferer is to spring. Its first quarter report, delivered May 1, showed losses increased 58% from a year earlier, to $38 million, while revenue was up 43% from a year earlier to $959 million.
That’s just the cost of growth, say the bulls.
The addition of Weebly, a web site design shop bought last year for $365 million, makes Square a direct competitor to Shopify (NASDAQ:SHOP) in the online space. Services like its alliance with Postmates and Caviar delivery make Square more attractive to merchants who don’t even have stores.
That makes Square a great investment in a fast-growth environment. If you bought SQ stock when it first came public near the end of 2015, you’re showing a 413% gain. That’s four times the gain you’d have booked in Visa (NYSE:V), the leader in merchant processing.
But narrow your focus just to the last year, as economic risks have increased, and the performance of Square and Visa are almost identical. Both are up 22%, a nice gain, but Square stock is increasingly volatile and, since March, has been heading down, while Visa continues making slow, steady progress higher.
Square’s addiction to growth is far from satisfied.
Its most recent purchase is Eloquent Labs, with which it hopes to give small businesses an artificial intelligence-based phone assistant that lets solo shop owners process phone inquiries just like big medical clinics do. Square has also introduced an invoicing tool that lets landscapers estimate and bill big jobs right on their customers’ doorstep.
Growing Economic Risks
Companies that, like Square, are addicted to growth will be under pressure when economic times get tough. When investors get spooked by things like the China trade war, they’re going to walk away from processors like Visa but run away from those like Square, even if its broad services and fintech make sense in the longer run.
Don’t expect to turn CEO Jack Dorsey from his path, either. Square came public with a dual-share structure that gives him absolute control. There are some writers at InvestorPlace who think this public-private company structure is just fine. I am not one of them.
At yesterday’s closing price of about $66 per share, Square carries a market cap of nearly $28 billion, more than seven times its expected 2019 revenue. This sounds extreme, but it’s in-line with the rest of the processing industry. Visa’s expected 2019 revenues of $22 billion support a market cap of $351 billion, although it brings almost half that revenue to the net income line and offers a small dividend. Fintech, and the various spin-off services that Square has helped pioneer, may be the hottest non-cloud investment niche in the market right now.
Bottom Line on SQ Stock
Reducing commercial friction, replacing cash with credit cards, invoicing, billing and loan approvals with fintech, all makes sense from a strategic perspective.
But when the market turns sour, as it seems to be turning, risk-on SQ stock is not where you want to be.
Square is especially vulnerable because its small business niche is itself economically vulnerable. Let it fall, wait for the clouds to lift, before stepping in if you want to book a profit.
Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of the 2018 mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write to him at email@example.com or follow him on Twitter. As of this writing he owned no shares in companies mentioned in this article.