Block (NASDAQ:SQ) is facing an array of intense, ominous threats, and its shares are not exactly cheap. Given these points, I continue to recommend that investors sell SQ stock.
The company is somewhat vulnerable to declines in the value of bitcoin, and Square’s involvement in cryptos exacerbates the chances that regulators will look to probe recent charges against it that were made by a short seller.
Meanwhile, I’m more convinced than ever that Square’s Cash App is facing a great deal of competition.
Potential Declines in Bitcoin’s Value Are a Headline Risk for SQ Stock
The SEC has cracked down on multiple crypto exchanges already and is likely to soon initiate legal action against the largest crypto exchange, Coinbase (NASDAQ:COIN), investment bank Berenberg wrote recently.
I believe that the looming crackdown on Coinbase will cause the value of Bitcoin (BTC) and other cryptos to plummet.
As of last year, Block owned 8,027 Bitcoin, which is now worth $$216.2 million.
Additionally, in the first quarter, Block’s Cash App generated gross profit of $50 million from bitcoin trading.
These figures suggest that Block’s exposure to crypto is not very high, since its total gross profit came in at $1.73 billion in Q1, while its total cash and short-term investments amounted to more than $6 billion as of the end of Q1.
Still, I believe that some retail investors could sell SQ stock on very adverse news involving crypto, given the company’s association with the sector.
Square’s Association With Crypto Increases Its Regulatory Risks
As I’ve noted in the past, senior members of the Biden administration, including Treasury Secretary Janet Yellen and SEC Chairman Gary Gensler, have long expressed hostility to cryptos. As a result, I believe that Square’s involvement with cryptos increase the chances that the U.S. will investigate the charges leveled against the company by Hindenburg.
The latter firm conducts research on stocks and shorts some of them. After conducting extensive research n SQ, it released a report on the company in March and noted that it was shorting SQ stock.
Hindenburg alleged that Block had allowed many “fake” accounts to be launched, while many of those accounts were utilized for fraudulent purposes and allowed criminals to evade detection. According to Hindenburg, the amount of interchange fees charged by Block exceed legal limits.
The firm wrote that “up to 35% of Cash App’s revenue comes from interchange fees.” In 2022, Cash App generated $10.63 billion of revenue, out of Square’s total top line of $17.5 billion.
Of course, any probe of these allegations by the U.S. government would result in SQ stock taking a big hit.
A Large Amount of Competition
In the past, I’ve noted that Cash App is facing a great deal of competition. But Seeking Alpha columnist, Tradevester, recently noted that Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Meta (NASDAQ:META) offer payment apps that compete with Cash App. Add in PayPal (NASDAQ:PYPL) and large banks’ Zelle app, which I have mentioned previously, and it’s clear that Cash App is facing a staggering amount of competition from many large companies with huge amounts of marketing power.
The Valuation of SQ Stock Is Still Unattractive
SQ stock has tumbled 18.49% in the three months that ended on May 18. But the shares still have a forward price-earnings ratio of 34.25, making them far from cheap.
Given the company’s many threats and the fact that its valuation is still elevated, I don’t think it’s wise for investors to hold SQ stock at this point.
On the date of publication, Larry Ramer was short COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.