Prior to the novel coronavirus disruption, Square (NYSE:SQ) was easily one of the most relevant technology firms available. To make a very long and profitable story short, the company evened the playing field, allowing small businesses to compete with larger rivals with convenient access to digital payment and business operation services. And the pandemic further intensified the bullish narrative for Square stock.
Of course, a major consequence of this crisis is increased paranoia — of the virus, of other people and of everyday objects with which we come into contact. Now, contactless services carried a substantial premium. This is perhaps best illustrated by Americans’ fear of handling cash. Last summer, most of us didn’t want to carry cash due to perceived Covid-19 infection risks.
Now, it’s not so important that the evidence of cash-related infections is limited. Well, let me back up — there’s certainly a possibility of getting Covid-19 through contaminated bills. But to my knowledge, no intensive study has quantified a high-risk profile for such transmission. But the point for Square stock is that fear is real, even if the threat driving it is irrational.
Cynically, this dynamic benefits Square and its organic facilitation of contactless payment options. Theoretically, it also incentivizes cash-only businesses to join everyone in the 21st century.
At the same time, neither Square stock nor the underlying company operates in a vacuum. And unfortunately, a cruel injustice is starting to cloud this otherwise compelling organization. As I explained at the top, SQ earned its generally positive reputation by evening the playing field for small businesses. But now, the coronavirus and the resultant governmental response threatens to undo that leveling.
Through no fault of its own, the disruptive company that gave a lifeline to the little guy, is watching its efforts go for naught. It’s something to keep in mind before gambling too heavily on Square stock at present levels.
Square Stock Faces a Negative Business Environment
Throughout the election cycle last year, the main criticism that came up regarding the federal government’s coronavirus emergency fund for small businesses was that it went to the wrong businesses. According to the Washington Post, “about 600 mostly larger companies, including dozens of national chains, received the maximum amount allowed under the program of $10 million.”
In other words, legitimate small businesses — the kind Square stock benefits from — received a disproportionately tiny share of those emergency funds, even though they were inarguably impacted the most.
Moving forward, President Joe Biden’s administration faces pressure to do something about the disaster. If it follows the same playbook as prior Democrat administrations, we could be seeing increased regulations. Interestingly enough, Square CEO Jack Dorsey isn’t a fan of onerous regulations, particularly if they eat into his cryptocurrency business.
However, the more pressing issue is regulations and policies that could negatively impact mom and pop entrepreneurs. For instance, it wasn’t until just recently that California Governor Gavin Newsom lifted the most draconian of stay-at-home rules. While that’s welcome news, it probably needed to come sooner, especially if you’re holding Square stock.
In 2019, food and drink establishments represented the bulk of Square’s gross payment volume (GPV) distribution at 26%. Retail came in second at 17%, followed by professional services (15%), beauty and personal care (11%) and healthcare and fitness (9%).
Put another way, outside of professional services, Square’s top five GPV leaders were among the worst-disrupted industries during this pandemic. Further, there’s no guarantee what California or other states will do if, heaven forbid, Covid-19 cases surge again.
Therefore, it’s hard to be too confident about Square stock. Yes, the underlying company is transformative, no question. But transformative doesn’t matter if no one’s around to experience it.
Politics Could Bite SQ
Despite the devastation, small business owners are apparently more optimistic than you might think. That’s according to survey data from NFIB, which reported that many small firms are planning to make capital outlays and to increase the size of their payroll.
However, another survey by NFIB reported that one of the major problems for entrepreneurs is taxes followed by government regulations and red tape. Interestingly, competition from large businesses was a concern but not nearly as much as taxes and regulations.
That’s a positive and a negative for Square stock. On the positive front, SQ has evened the playing field to such a degree that it’s not the biggest concern for small businesses. But on the other end, revenue-stifling regulations have got to be the most frustrating way to watch a compelling business lose its shine.
Moreover, I don’t think SQ stakeholders should expect the Democrats to change course. Therefore, we could see more intense stay-at-home policies, if only because former President Donald Trump was against them.
Again, none of this high-level Washingtonian BS is Square’s fault. But that fact alone is not going to give a reprieve to SQ stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.