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Square Stock in Rough Shape; Investors on Standby
Stock Analysis & Ideas

Square Stock in Rough Shape; Investors on Standby

Square (SQ) stock had an underwhelming year. It is down around 4% year-to-date, struggling to put in a bottom after its latest bear market plunge. The $100 billion financial services and payments company had been quite hot over the past five years, doubling up many times over. So, it was just a matter of time before the name finally had a chance to cool off, giving its top- and bottom-line a chance to catch up to its incredibly lofty multiple.

Even after a 20% peak-to-trough drop, though, Square stock is still up considerably (around 160%) from its pre-pandemic high, leaving way more room to the downside if the company can’t pass the high bar analysts have set for it. At writing, shares of SQ trade at around six times sales and 228 times trailing earnings. Not cheap, but certainly not the most expensive growth stock in the world, especially as more rivals go after the red-hot fintech space.

My main concern with Square is the competitive threats that could take a major stride out of the company’s incredible growth. Yes, Square is still growing at an impressive rate, with net revenue rising 27% and gross payments volumes rising 43%. However, it will become tougher to maintain such numbers at such impressive levels, as pressure from rivals, both large and small, increase with time. For that reason, I am bearish on SQ stock at these valuations.

See SQ Stock Charts on TipRanks >>

Square’s Cash App Growth Slowing

Square’s third-quarter results were not dreadful, but there was some hair on the top-line numbers and other causes for concern, specifically with Cash App’s growth. Revenue for Cash App rose 16% year over year. However, the comparables were tough, given the pandemic boost the app received a year ago.

Bitcoin (BTC-USD) revenues were also remarkably weak, but it is worth noting that Bitcoin wasn’t a huge bottom-line needle-mover, to begin with. Still, given Bitcoin’s cyclicality, there is a risk that an implosion in the asset could cause growth to cool further.

At this juncture, the real question on investors’ minds is whether Cash App’s sudden slow in pace is the beginning of a trend or if it’s just a transitory “hangover” after an incredible year.

The stakes are undoubtedly high at this juncture, but the electronic payments tailwind is still at Square’s back. Such a strong, long-lived tailwind is likely to draw in more competition, though. And if Square can’t remain at the cutting edge of innovation, there’s a risk that the firm could be bent out of shape.

Will Afterpay Pay-Off?

Buy Now Pay Later (BNPL) has been a hot topic this year among players in the fintech space. Credit card companies pulled back the curtain on BNPL offerings of their own, while big-league retailers teamed up with a BNPL pure-play company.

Square raised the stakes by scooping up Australian BNPL firm Afterpay, a deal that came at a hefty $29 billion price tag. Such an acquisition turned Square from a disrupted firm to a disruptor. Undoubtedly, the company prefers playing the role of disruptor, and it’s played the role well over the years.

Meta Platforms (FB), formerly Facebook, is another dominant tech behemoth that acquired competitive threats en route to becoming a nearly $1 trillion company. It’s a magnificent strategy on paper, but it’s also one that could draw in greater attention from federal regulators, thereby increasing the company’s financial risks.

Square: M&A Raises Potential Rewards and Risks

For now, Square isn’t big enough to draw too much regulatory scrutiny from its M&A. But that doesn’t mean the Afterpay acquisition will pay off, even if Square shareholders did give it the green light. Why is that? The price paid for the firm is steep. And while BNPL is hot right now, it could really be a source of pain, come the next structured economic downturn. Indeed, the appetite for borrowing to purchase big-ticket discretionary goods is bound to fall in conjunction with consumer confidence.

Of course, nobody knows when the next prolonged recession will be, or if the government will be inclined to money-print its way out of it. Should we be in the early stages of a “roaring ’20’s” environment, though, Square’s Afterpay acquisition could prove to be genius.

In any case, Square remains a high-risk/high-reward proposition that only venturesome investors should consider.

Wall Street’s Take

According to TipRanks’ consensus analyst rating, SQ stock comes in as a Buy. Out of 22 analyst ratings, there are 17 Buy recommendations, 4 Hold recommendations and 1 Sell recommendation.

As for price targets, the average Square price target is $306.48, implying an upside of 44.7%. Analyst price targets range from a low of $210.00 per share to a high of $380.00 per share.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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