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Square Inc: Should You Buy SQ Stock? 3 Pros, 3 Cons

Square stock has been a roller coaster lately. But is there an opportunity here for investors?

When Square Inc (SQ) went public in mid-November 2015, the initial public offering was surrounded by optimism that it would spark a comeback for tech IPOs. After all, on the debut, the stock racked up an impressive 45%.

Square Stock: Should You Buy SQ? 3 Pros, 3 ConsBut the good times didn’t last as the market plunged into a wrenching correction. The resulting shockwave sent Square stock from nearly $15 to $8 (keep in mind that the offering price on the IPO was $9).

Although, this was not an end to the roller coaster: As the market made a move to the upside, so did Square stock — and in an impressive way. Now the SQ stock price is $12. Not bad.

Yet, I wouldn’t be surprised to see more volatility in the cards. Especially after SQ reports its fourth-quarter numbers on the close of trading Wednesday. The Street consensus is for revenues of $343.22 million and a net loss of 13 cent a share.

So, what should investors do? Here are three pros and three cons on Square stock to help you make an informed decision:

Square Stock Pros

Strong Growth Business: Square co-founder and CEO Jack Dorsey had impeccable timing when he started the company during 2009. It was a couple years after the launch of the Apple (AAPL) iPhone and, yes, there was a huge opportunity to ride the mobile wave. So Jack had a creative idea to develop a free accessory to transform a smartphone into a processor for credit and debit cards. And yes, growth was strong from the beginning. It also helped that Jack had big-time connections to snag tier-1 investors, including Visa (V). So between 2012 to 2014, revenues surged from $203.4 million to $850.2 million. For the 12 months ended September 30, 2015, SQ processed a whopping $32.4 billion in gross payments volume from 180 million payment cards.

“Square is used to purchase everything from doughnuts to karate classes to software sales on a trade show floor,” said eFileCabinet CEO Matt Peterson over email. “Small businesses need solutions like Square to combat the uphill fight to profitability and success.”

Platform Play: Roughly 95% of revenues come from the core payments processing business. But the real opportunity for SQ is how this can be a launchpad for new revenue streams. In fact, the company has been aggressive in adding new features and offerings, such as payroll, small business loans, analytics, inventory management and online marketing. But the one thing that could provide the most powerful growth driver is Square Cash, allowing for person-to-person payments. This is essentially what PayPal (PYPL) does, which is certainly a massive business, and why PayPal is valued at $47 billion.

Secular Trends: The phone is increasingly becoming the digital wallet for people. Consider that the value of mobile payment transactions in the U.S. is expected to surge by 210% in 2016 to $27.05 billion. If anything, the key drivers will be marketing prowess from companies like Apple, Alphabet (GOOG, GOOGL) and Samsung (SSNLF). But there is another positive for SQ – that is, the company’s target market of small businesses is massive. Based on data from the U.S. Census Bureau, there are about 30 million in the US. Something else to keep in mind: About 20 million small businesses do not even accept credit cards today!

Square Stock Cons

Competition: To say the least, it’s intense. Square must fight against a variety of older players in the market like Intuit (INTU) and VeriFone Systems, Inc. (PAY). What’s more, there are the Internet giants that are making a play for the opportunity, like Apple, Alphabet, Amazon.com, Inc. (AMZN), PayPal and Samsung. Oh, and yes, there are a host of startups like Stripe. And finally, SQ must deal with financial firms that are developing their own offerings, like JP Morgan Chase (JPM) and American Express (AXP), as well as brick-and-mortar retailers, such as Walmart (WMT) and Starbucks (SBUX). Actually, SQ currently has a partnership with Starbucks, but it has been mostly a failure and it appears that it will be terminated this year. For the first three quarters of 2015, Square incurred $118.5 million in costs, but was only able to book $95.2 million in revenues.

Managerial Bandwidth: Of course, Dorsey is also the CEO of another company, Twitter (TWTR). In other words, he really does not have as much time to devote to either company. No doubt, this could ultimately hinder SQ as it needs to compete against a host of tough competitors. If anything, there are already some signs that Dorsey’s part-time status is having an impact. Consider that there are some difficulties with using the service.

“One of the primary downsides to Square is the add-on services,” said Stuart Wall, who is the CEO and founder of Signpost. “They take quite a bit of customization to get traction. But smaller Square merchants have very little time and are not likely focused on or fully versed with the options enough to take full advantage of the platform.”

Financials and Credit Risks: The financial are not pretty. During the most recent quarter, SQ posted a hefty loss of $53.9 million. So even though the company has reached large scale on revenues, it still cannot find a way to get to some reasonable level of profitability. There are also risks with the focus on small businesses. After all, if the economy is slowing down — which there are signs that it is — then these operators could be under lots of pressure. In fact, SQ could have further risks since it has been extending loans to customers. Keep in mind that Wedbush analyst Gil Luria recently downgraded Square stock due in part to concerns about such credit risks.

Bottom Line on Square Stock

Square Inc is certainly an example of the power of mobile technologies. In a relatively short period of time, the company has built a compelling platform that has generated substantial revenues and payment volume.

Unfortunately, Square stock still has many issues. Just some include the intense competition, a part-time CEO, hefty losses and the potential problems with a slowing economy and credit risks.

Besides, Square stock has already had a big run, and it appears that part of it has come from a short squeeze (about 30% of the float is in short positions), which will have only a temporary impact.

So should you buy SQ stock?

No.

The risks still look too significant to make a bet on this one.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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