Bank of America (NYSE:BAC) fears that the decimation of small business resulting from the novel coronavirus pandemic is going to crush Square (NASDAQ:SQ).
The bank lowered its rating from buy to underperform May 18. After a morning stutter, investors ignored the warning. SQ stock opened for trade May 20 at $81/share, a market cap of about $35 billion and a nosebleed price-to-earnings ratio of 120.
While many companies, especially in the payments industry, have felt paralyzed by the pandemic, Square CEO Jack Dorsey has proven hyperactive.
In the last few months, Square has launched Online Checkout to help small businesses move immediately into e-commerce. Its Cash app offers fast access to Covid-19 stimulus payments and now supports automatic investments in bitcoin.
Dorsey’s Day
Dorsey once hoped to spend half of 2020 in Africa. Now he’s turning himself into an American hero, putting 28% of his equity in both Square and Twitter (NASDAQ:TWTR), which he also runs, into pandemic relief efforts. After the pandemic, he wants the money to help girls get better healthcare and education. He also supports a universal basic income.
Having been forced to experiment with a work-at-home model during the pandemic, Dorsey is now calling that a permanent change at both companies. It’s something Red Hat, now part of International Business Machines (NYSE:IBM), began offering to engineers years ago. It could have profound impacts on Square’s cost of doing business. Dorsey says he can now hire people from anywhere. But Dorsey insists working from home has no impact on productivity.
Dorsey had been considered a nut, running two companies at once and leaving for months at a time. Now he’s being called “a brilliant dual CEO … [who] may reshape the way people work, where they live and how much they’ll be paid.”
Square Overpriced?
From the perspective of the stock market, what had been a Dorsey discount on Square stock is now a premium.
While shares of payments leader Visa (NYSE:V) are level on the year, Square is up 26%. The difference has become especially pronounced since Square’s earnings release May 6. That was a loss of $106 million, 24 cents per share. But revenue was up about 40% at $1.38 billion, against $959 million a year ago.
Most of that came in the form of bitcoin, where revenue was reported at $306 million, against $65.5 million in 2019. That business was only marginally profitable, revenues just $6.5 million over costs. But gross profit for the company was up $140 million, to $538 million.
The most troubling number in the report was loan losses, at $109 million, up from under $28 million. That’s something investors are going to have to look at closely when Square next reports in August.
Still, many analysts are now writing nice things about Square. Yipitdata noted that the Cash app is now stronger than before the pandemic. Opal Investment Research said there was “a lot to like” in the first-quarter report.
The Bottom Line on SQ Stock
The good news for investors is that there remain Square bears. In addition to the Bank of America comments, Mott Capital saw the stock nearing a “big reversal “ because earnings estimates have been cut.
Lower earnings with bigger revenue, however, boosts stock prices. This is especially true when there is a lot of capital to invest, as there is now. If everyone is in something, its price is doomed to fall, because everyone is in the pool. A “wall of worry,” and Square’s short interest is currently over 25% of its volume, gives bulls confidence.
While SQ stock is overpriced, you can make a profitable trade in it so long as the pandemic isn’t cutting into the capital available to invest.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
