Things Bleak for Square Stock in a Slowing Economy

It’s been about four years since Square (NYSE:SQ) came public. At the time of the deal, there was mostly a chilly reception from investors. Square stock priced at $9, which was below the range of $11 and $13. The valuation was actually lower than the company’s prior round of venture funding.

Things Bleak for Square Stock in a Slowing Economy

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Interestingly, recently SQ stock is undergoing a similar period of skepticism (which, by the way, has come after a powerful bull move for the past couple years). During the past few months, the shares have gone from $82 to $59. The result is that the year-to-date return on Square stock is only about 7%. In fact, for the past 12 months, the shares have sustained a 39% loss.

It’s true that many tech stocks, especially the high-fliers, have come under pressure as well. Just look at the major drops in companies like Zoom Video Communications (NASDAQ:ZM) and Okta (NASDAQ:OKTA).

But hey, when it comes to tech stocks, there are periodic swoons. Yet they have been temporary – and yes, good buying opportunities.

So might this mean that SQ stock is a good opportunity right now?  Well, there’s little doubt that the company has a solid platform and is a leader in the fast-growing payments market.

All this has come from a fairly simple application, launched in 2009, that involved a credit card reader that connected to an Apple (NASDAQ:AAPL) smartphone or Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) Android device.

From there, CEO Jack Dorsey was aggressive in expanding the platform into a myriad of categories like payroll, gift cards, loyalty programs, marketing services, eCommerce, business loans and so on. The result is that Square has become a very sticky service.

Although, the move into loans may be having the most impact. “The company is getting a piece of the origination fee, which is pure profit,” said Chris Ligan, who is the VP of Acquisitions for point-of-sale credit card processor Auric. In all, SQ has loaned customers about $5 billion.

The Market and Square Stock

The market opportunity for payments is enormous – estimated at over $100 trillion on a global basis. But this means there is much competition coming into the segment. Of course, there are startups popping up as the venture capital markets are awash with huge amounts of money.

But even traditional financial institutions are leveraging their own platforms and customer bases to get a piece of the opportunity. Consider that 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) are the backers of a payments app, called Zelle, which has been getting lots of traction.

“What ends up happening is as concepts get commoditized, it is tough to remain relevant,” said Zafin executive vice president of global partner growth and sales strategy, Meenaz Sunderji.

Bottom Line on Square Stock

Even with the drop-off in the share price, the valuation on SQ stock is still far from cheap. Consider that the forward price-to-earnings multiple is about 54X. In other words, Wall Street is still expecting quite a bit of growth on the top line.

But this could be tough to maintain. Besides the emerging competition and the risks of commoditization, SQ also is vulnerable to a slowdown in the U.S. economy (and yes, the recent data does look ominous). Let’s face it, the company’s customer base is primarily made up of small businesses, and they usually get hit the hardest when the economy goes into recession.

So in light of all this, it’s probably best to avoid Square stock for now.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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