While Square (NYSE:SQ) stock has gained a respectable 12.6% in the past year, that performance pales in comparison to the previous 12-month periods, when SQ stock nearly doubled each year.
Not only that, the shares have also been disappointing when looking at other companies in the space. Consider that the annual return for Shopify (NYSE:SHOP) is a sizzling 91% while PayPal (NASDAQ:PYPL) stock has risen 37% and Visa (NYSE:V) is up 28%.
Now the payments industry holds tremendous opportunity. One estimate is that the size is a whopping $110 trillion on a global basis. No doubt, technologies like cloud computing, mobile and AI (artificial intelligence) will continue to be disruptive forces.
Yet despite all this, I still think there are some nagging risks with Square stock. Let’s take a look:
SQ Stock: Growth
SQ continues to grow at a fast pace. In the latest quarter, net revenues jumped by 43% and adjusted revenues spiked by 59%. The company also increased its full-year guidance.
Yet there are some potential issues with the growth story. For example, gross payment volume increased by only about 27% to $22.6 billion. The Street, on the other hand, was looking for $22.8 billion.
As well, the U.S. economy is showing some signs of weakness, as seen with a drop-off in job gains and sluggishness with retail sales. Businesses also appear to be pulling back on making investments because of the uncertainty regarding trade, especially with China.
If there is a recession or a serious slowdown, SQ could take big heat. The reason is that a big chunk of the company’s revenue come from small businesses. And yes, they generally are disproportionately effected during economic hard times.
According to Square’s 10-K filing: “Small businesses frequently have limited budgets and limited access to capital, and they may choose to allocate their spending to items other than our financial or marketing services, especially in times of economic uncertainty or in recessions. In addition, if more of our sellers cease to operate, this may have an adverse impact not only on the growth of our payments services but also on our transaction and advance loss rates, and the success of our other services.”
Square Stock: Valuation
Even though SQ stock is 30% off its 52-week high — which was tipped in September — the valuation is still far from cheap. Note that the forward price-to-earnings ratio is roughly 63x and the shares trade at about 8.3x sales.
Now a premium is deserved for a company with Square’s strong platform, brand and customer base. But then again, if the growth rate starts to falter, there could easily be more downside. We already saw evidence of this in the latest earnings report.
SQ Stock: Managerial Bandwidth
A key part of Square’s strategy has been to add more and more services on its platform. This has not only provided more convenience for customers but has expanded the market opportunity. Note that this strategy has been critical in keeping up the overall growth rate as payments volumes have been trailing off.
But there is a risk to this strategy — that is, it increases the complexity of the organization. The services span diverse categories like invoices, deposits, inventory, appointments, website hosting, marketing, employee management, business loans and so on. All of these are in highly competitive markets.
Besides, CEO Jack Dorsey is essentially a part-time CEO, as he also heads up Twitter (NYSE:TWTR). So it will certainly get more challenging for him to manage SQ as the business scales.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
