For investors in Square (NYSE:SQ) stock, it hasn’t been a great summer so far. All around, stocks are hitting new record highs. The S&P 500 index came within a few points of reaching 3,000 for the first time. The tech-heavy Nasdaq Composite index has been roaring. Software and internet stocks are absolutely booming at the moment. But SQ stock is doing nothing much at all.
Since its peak at $101 last fall, SQ stock has been in a deep slump. By December, it had lost half its value, retreating to $50 a share. Square stock bounced back this spring, hitting $80 again in March. Since then, SQ stock has gone sideways to down, however, even as the market has taken off like a firecracker. At the current $73-and-change price, Square stock remains more than 25% below its record highs.
It’s not hard to see why investors are nervous. Competition looms large for Square. The company is still unprofitable on a trailing earnings basis. And it appears to be running out of strong domestic opportunities; bulls are already pointing to markets like Japan as Square’s salvation. But if it can’t make much money at home, will it do better overseas? Meanwhile rivals spanning from Apple (NASDAQ:AAPL) and PayPal (NASDAQ:PYPL) to new things such as Facebook’s (NASDAQ:FB) Libra coin could upend Square’s plans.
Is Libra a Threat to Square?
Last month, FB announced its long-awaited crypto-currency venture. Called the Libra, Facebook has grand ambitions for its entry into the crypto space.
The Libra will be backed by hard assets with the aim of being a relatively stable store of value that users can transact with, globally, avoiding much of the world’s current regulations and roadblocks to the free flow of money. Interesting, the Libra has a huge group of launching backers – several dozen in fact. These include almost all the power players in the payments space. The credit card companies are in, as is PayPal, eBay (NASDAQ:EBAY), Stripe, and several payments companies in emerging markets.
Who is missing from the Libra launching coalition? Along with the big banks, Square isn’t there. That’s particularly interesting since other direct competitors to Square — like Stripe — are happy to be involved. Should SQ stock owners be worried?
On the one hand, Libra, at least as it is now envisioned, isn’t a big threat to Square’s primary small business transaction processing at this point. Libra’s big play, at least for now, appears to be taking on the entrenched fee-heavy money transfer and remittances services, like Western Union (NYSE:WU) and MoneyGram International (NASDAQ:MGI).
So Square’s main business isn’t too directly threatened (yet).
However, do note that Libra would compete more heavily with Square’s Cash App. Also, it’s worth considering that PayPal, which owns Venmo, is involved in Libra. PayPal certainly doesn’t want the Libra to supplant Venmo. But as a backer of Libra, PayPal has way-more influence in how things go, while Square — and its Cash App — are on the outside looking in.
Cash App may not Matter Much to SQ Stock
Interestingly, it may not be a big deal even if the Libra supplants much of Cash App’s business. That’s because Square likely generates very little revenue from Cash App as it is.
Our Vince Martin broke down the numbers in a recent article. Given that PayPal’s Venmo is a $300 million a year business, that means Square’s necessarily is even smaller, since Venmo has more users and activity than Cash App. Though, in defense of Square, Cash App appears to be catching up based on download figures.
Regardless, Square has a $30 billion market cap and $3.5 billion in annual revenues. Cash App is still something close to a rounding error for the overall business. It appears, at this point, to serve more as marketing for the Square platform than as a profit driver in its own right. So if much of Venmo and Cash App business gets diverted to Libra, it may not be a big issue for SQ stock.
Can the Core Business Make Money?
Unfortunately, this highlights the bigger issue for SQ stock. Despite penetrating a large portion of the small business market in the U.S., Square continues to lose money. At some point, you have to ask: When will this company be able to make money? Over the past 12 months, Square lost more than $50 million on its revenue of $3.5 billion.
With U.S. growth already reaching limits, Square is now looking to overseas markets such as England for further opportunities. Perhaps most interestingly, some bulls see Japan as the next big thing for Square. Josh Enomoto highlighted the potential there, noting that Japanese consumers still love physical cash, in part because small stores don’t like accepting credit cards. Enomoto wrote:
Installing Square’s payment-processing equipment isn’t difficult. It also gives small Japanese businesses a more equal playing field against their larger counterparts. If more proprietors bought into this concept, it can create a ripple effect that ultimately skyrockets SQ stock.
If the business model hasn’t reached meaningful profitability in the U.S. yet, however, will going overseas improve matters? There will surely be more overhead, marketing costs, and so on to set up in new markets. And unfamiliarity with local customs will likely lead to some losses and setbacks as well.
Bottom Line on SQ Stock
SQ stock is now trading at 65.6x forward earnings, as it faces too much competition and offers too little certainty. That’s if they manage to hit analyst estimates. As it is, the company has no “E” in the P/E ratio at the moment since it lost money last year.
It’s not clear how the company plans to monetize the Cash App, many bulls’ current big hope for the future. And international expansion could lead to more headaches down the road. Facebook’s Libra, if it is a hit with consumers, could cause trouble for Square on multiple fronts as well. Square stock has an interesting story. But at nearly 10x sales and a massive forward P/E ratio, Square stock investors are paying a high price for an uncertain future.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.
