That’s a sentence I didn’t expect to write a year ago, and I really didn’t expect it to mean that SQ stock is less bad than PYPL stock, but that’s the situation that investors find themselves in.
As such, Block is down 31% while PayPal is down 48%.
However, despite a strong earnings report, SQ stock can’t stop its slide. It would seem investors are voting with their dollars. In this case, they’re not buying what the company formerly known as Square is selling.
A particular takeaway from the company’s earnings report was the market’s “meh” reaction to strong performance from the company’s Cash App. As Louis Navellier points out, Cash App’s gross profit growth was significantly lower than in the prior year’s quarter.
That’s why I think Block’s pyrrhic superiority over PayPal is coming to an end. In fact, I believe that PYPL stock is likely to recover, albeit not at its prior levels.
I don’t believe the same can be said of SQ stock. There are simply too many factors weighing on the stock.
In addition to facing competition in the financial technology (fintech) sector, Block faces exposure to the cryptocurrency market which is having problems of its own.
It’s Getting Late Early for SQ Stock
One year ago, I wouldn’t have predicted that Block would perform this way. At that time, JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon was calling fintech the largest threat to legacy banking operations.
The drop in fintech stocks is about more than the stocks having been overvalued for much of last year. Also, it’s not sufficient to say that what’s happening is just part of the tech sell-off. Stocks like SQ and PYPL were dropping before the broader market.
Plus, the tech sector is seeing some evidence of green shoots. The same can’t be said for fintech stocks.
The fintech market got old quickly. I’ll admit to missing the warning signs. The pandemic created mass adoption of e-commerce and the need for digital payment solutions. At the time, PayPal and Block had the field largely to themselves.
This is a cautionary tale of what happens when a business (and in this case an entire sector) doesn’t have a defensible moat. As Larry Ramer points out, in addition to PayPal, Block is likely to face competition from Shopify (NYSE:SHOP), and Apple (NASDAQ:AAPL).
Desperation or Genius?
What makes the situation for Block precarious is that the company’s CEO has a commitment, bordering on obsession, to cryptocurrency. As evidence of this, Block just started a promotion with Shake Shack (NYSE:SHAK). Customers will receive cash back equal to 15% of their purchase in Bitcoin (BTC-USD).
That move will either come across as desperate or inspired.
To qualify, customers must use Block’s Cash Card, a debit card for the company’s Cash App users, or make purchases via Cash Boost, Block’s reward program for Cash Card members.
So far, Shake Shack has seen no evidence that suggests customers are demanding to use crypto to make purchases. But the company is looking at this as a trial balloon of sorts to determine whether it should expand its use of cryptocurrency as a form of payment or by extending the reward program.
However, this is another situation where the company is going to face competition from established businesses in the crypto and blockchain sectors.
Make SQ Stock Prove It to You
If you needed one more reason to avoid SQ stock, I’d point to the level of institutional ownership drying up. While buyers still outnumber sellers over the last 12 months, institutional investing dropped to a trickle in the last quarter.
Even if you believe that Block is telling an underappreciated growth story, it’s going to be hard for the company’s stock price to appreciate with retail investors having to do the heavy lifting. Particularly in the tech sector.
Even if growth stocks are in for a rough year or two, there are better options than SQ stock.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.