Fintech darling Square (NYSE:SQ) continued its roller coaster performance this week, closing down almost 4% on Wednesday. Square stock had seen significant growth to start 2019 but that changed to a downward trend after the company reported Q1 earnings on May 1. Since then, Square stock stock performance has been all over the map, but the trend has been downward.
Yesterday’s drop means SQ is down 14% since the start of the month. The big questions are, why is Square sliding and why the recent volatility?
SQ Stock Trouble? Not China and Not Privacy
One thing Square has going for it is a lack of exposure to two of the biggest issues that have been wreaking havoc with tech stocks over the past year: the trade war with China and privacy concerns.
Companies like Apple (NASDAQ:AAPL) have seen their stock repeatedly hit by an escalating trade war between the U.S. and China, that has resulted in tariffs and the threat of boycotts. Square’s mobile payment processing is currently available in the U.S., Canada, Japan, Australia and the United Kingdom — not China.
The one area where SQ stock could have a minor exposure is its hardware. Square designs its own hardware, but does have manufacturing partners outside the U.S., and high-tech products like the Square Terminal and Square Reader may utilize components that are affected. In Q1, the company reported hardware revenue of $18 million, but that is a drop in the bucket compared to its $959 million in total net revenue.
Square CEO Jack Dorsey’s other gig — Twitter (NASDAQ:TWTR) — along with other tech giants has seen its stock hit by ongoing investigations over privacy, fake information, and election interference. Square is in the clear on this front.
Square’s Q1 Earnings Failed to Impress
Things got rough for Square stock when the company reported its Q1 earnings on May 1, resulting in a 6% drop for SQ. While total net revenue was up 43% year-over-year with an adjusted EPS of 11 cents, Square’s losses widened to $38 million (from $24 million in Q1 2018). A big part of that was operating expenses of $419 million, which were up 52% compared to Q1 2018. What had many investors concerned was gross payment volume of $22.6 billion, which grew 27% on the year, but missed analyst expectations by $200 million.
Square’s growth is showing signs of slowing … Worse, Square issued Q2 guidance for EPS of between 14 cents and 16 cents per share, again lower than analysts had been expecting.
Increasing Competition for Square Stock
Square faces increasing competition in virtually all areas of its business, and that has contributed to the turbulence in Square stock.
PayPal’s (NASDAQ:PYPL) Venmo competes directly with Square’s Cash app for consumers, and Venmo posted payment volume growth of 73% year-over-year in Q1, on volume of $21 billion. Other companies have taken note of Square’s success in point-of-sale and have launched their own competing services. For example, a month ago Canadian fintech Shopify (NYSE:SHOP) took aim at Square with a move from web sales to introducing a new line of retail hardware, including a card reader and a point of sale tablet.
As InvestorPlace contributor Ian Bezek points out, Square has a valuation that is much higher than other companies focused on payment technology. Unlike other tech companies, a trade war with China and the prospect of fines and regulation over user data is not an issue for SQ. But combine that high valuation with slowing payment volume growth, disappointing earnings guidance, increased competition and inevitable takeover talk, and you get the perfect recipe for Square stock volatility, and an overall downward trend.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.