Even after a 60%-plus drop in shares of digital payments company Block (NYSE:SQ) — formerly known as Square — SQ stock is still trading at very high valuations. And the company faces a number of challenges that make it an unappealing investment.
In addition to stiff competition from PayPal (NASDAQ:PYPL) and Shopify (NYSE:SHOP), Apple (NASDAQ:AAPL) could be getting ready to provide payments systems to small businesses. There are also plenty of players in the blockchain and cryptocurrency sectors, where Block hopes to make inroads. Meanwhile, the cryptocurrency bubble is popping.
Finally, on the macro front, the market is still less than thrilled with growth stocks in general and the digital payments sector in particular.
Block Faces Competition From Every Angle
While Block is a leader in point-of-sale platforms and payment processing, it has stiff and growing competition.
For instance, NerdWallet calls PayPal’s Zettle a “good overall alternative” to Block’s Square. As the website points out, Zettle charges 2.29% plus 9 cents per in-person transaction for its payment processing compared to Square’s 2.6% plus 10 cents per in-person transaction. NerdWallet also highlights Shopify’s POS system as “good for e-commerce,” while it says Toast (NYSE:TOST) offers an alternative that’s “good for restaurants.”
But perhaps the biggest threat to Block, and in turn SQ stock, is Apple, which is developing a system that would allow entrepreneurs to take payments using their iPhones without additional hardware. Not only will this be more convenient than Block’s Square, but Apple can easily market any service through the iPhone to tens of thousands of small businesses.
Block’s Cash App also faces tough competition in the consumer mobile payment space. A number of large, legacy banks have partnered to create Zelle, a digital banking system that has become quite popular. PayPal, which owns Venmo, is a heavyweight in peer-to-peer payments. And SoFi Technologies (NASDAQ:SOFI) has had success in the space as well with SoFi Money.
Cryptocurrency, Blockchain Present Challenges
Block CEO Jack Dorsey is itching to expand Block’s reach in cryptocurrency and blockchain, hence the company’s name change. As one step in this direction, the company has launched a Bitcoin (CCC:BTC-USD)-focused financial services division.
But, as I’ve written in previous columns, I believe cryptocurrencies entered a bubble driven primarily by government stimulus. There has been a great deal of evidence to support my thesis as of late. The price of bitcoin and other cryptocurrencies came tumbling down as the Federal Reserve reduced its asset purchases and federal stimulus dried up.
When the Fed finally stops buying bonds and securities in March and potentially begins allowing the value of its balance sheet to drop later this year, there’s a good chance the price of cryptocurrencies will fall further. And given Dorsey’s focus on crypto initiatives, SQ stock could be dragged down as well.
In short, Square is looking to enter some crowded areas at a time when the market is less than enamored with the sectors.
The Bottom Line on SQ Stock
Fintech stocks have been hammered over the past six months, with the Global X FinTech ETF (NASDAQ:FINX) falling close to 30%. SQ stock has fallen twice as much during that period and still carries a price-to-earnings ratio of 93 and a price-to-sales ratio of nearly 4.
Given the threats and challenges currently facing the company, I believe the outlook for SQ stock is poor in the near term and medium term, and quite uncertain over the longer term. Consequently, I recommend that investors sell the shares.
On the date of publication, Larry Ramer held a short position in COIN stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.