Square sells for just 8.5 times revenue, low for its group because it doesn’t make money. But it’s growing at 30% per year, albeit from a small base. Compare that to the 10%-15% growth rate of bigger processors, but with substantial earnings and even (sometimes) dividends.
Because Square’s business is new, it lacks the technology debt of the big boys. This means it can also jump into new areas of business quickly. But, again because of its size and age, some of its ideas are loony. CEO Jack Dorsey, for instance, loves Bitcoin.
So where should you put your money? It depends on your age and your goals.
When to Buy Square
Young investors, people who are in their early 40s like Dorsey, would do better in Square.
But because the stock is volatile, you must watch it carefully. Just this year it has traded below $50 and as high as $100 per share. This might be a good time to jump on. A surprise profit of $29 million, or 7 cents a share, on revenue of $1.3 billion sent shares up. They’re still closer to the bottom of their trading range than the top.
But don’t fall in love. This is still, basically, a transaction processor. Things like its Cash App, its loan portfolio and its ability to trade stocks aren’t material to the investment case.
When you see analysts pretending otherwise, and see it getting near the top of the range, consider selling and waiting a bit. Don’t worry too much about its valuation. For a processor, Square is cheap. Visa, for instance, sells at 17.5 times revenue.
Most financial technology stocks are overbought. With interest rates negligible, they’re better than the banks they serve. Over the last two years both Square and Visa have tripled the returns of JPMorgan Chase (NYSE:JPM). Visa has almost surpassed JPM in market capitalization.
This is subject to change. If interest rate spreads increase, things could change. JPMorgan, remember, is a processor just like the fintechs. If you have an Amazon (NASDAQ:AMZN) credit card, it’s actually from JPMorgan Chase. The difference is that banks usually take the customer side of the transaction, which means they get interest but also take more risk of default.
Square is completely on the merchant side. This has been the place to be most of this decade, even though the risk of paying for fraud has shifted to merchants as part of the move to chip-based cards.
If you’re an older investor who doesn’t want to look at the market every day and needs stability, you’re better off with a mix of Visa stock and bank stocks. They’re larger, less volatile and offer dividends.
A recent Federal Reserve move to consider a “stablecoin,” a cryptocurrency tied to the U.S. dollar, shows regulators want to keep these companies competitive even as processing costs drop. A stablecoin would keep money in the transaction system longer. It would lower costs, increase profits and make the banks more competitive.
The Bottom Line on Square Stock
The bottom line is that a young investor should buy Square with money they can afford to lose, when it’s close to the bottom of its trading range. Long-term investors are better off in banks and pure processors, confident that the Federal Reserve has their backs.
As companies in this space mature, and as their revenue grows, their moves become less explosive. They age like fine investors do, becoming more mature.
Square should mature during the next decade. It just hasn’t done so yet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and JPM.