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3 Pros and 3 Cons for Buying Square Inc Stock

Lucas Hahn

Square Inc (NYSE:SQ) stock closed on Monday at $51.12 a share. Square stock fell after reporting its first-quarter results after markets closed on May 2. And Square beat on revenue but not on earnings. Quarterly revenue grew 45% year-over-year, reaching $669 million.

Square’s gross payment volume rose 31% to $17.8 billion in the first quarter, and transaction-based revenue, which accounts for most of Square’s sales, rose 30% to $523 million. Higher margin subscription and services revenue, which includes Square Capital loans and Caviar, a food delivery service, almost doubled, hitting $97 million.

However, Square’s net loss widened, reaching $24 million, up from $15 million the year before.

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Square has made two deals in the past month. On April 19, Square announced it was purchasing Zesty, a catering startup, to complement Square Caviar. A week later, Square bought Weebly, a startup which enables small business owners to set up online stores, for $365 million.

Square also got some attention from Citron Research, a short-selling firm which sounded the alarms on Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock in October 2015. On Twitter Inc (NYSE:TWTR), the platform which Square CEO Jack Dorsey also runs, Citron sounded off:

Is Square stock a buy?

Square Stock Pros

Revenue Growth Accelerating: As InvestorPlace contributor Tom Taulli recently mentioned, Square is seeing a surge in revenue growth.

Square is not only growing revenue; it is growing quarterly revenue at an increasingly faster pace.

Square’s quarterly revenue has increased on an annual basis at a faster rate for five quarters now. Square’s revenue in the fourth quarter of 2016, was up 20.7% from the previous year. Revenue in the most recent quarter grew 45% year-over-year.

Smart Acquisition: Square’s purchase of Weebly will strengthen its competitiveness.

Square noted that merchants want “one cohesive solution” for their business needs, including website tools, payments processing and financing.

Square’s competitors seem to agree. Square’s European competitor, iZettle, offers mobile point of sale (mPOS) solutions and loans for merchants. Last month, iZettle added website tools to allow stores to set up their own websites.

Like Weebly, Shopify Inc. (NYSE:SHOP) also provides stores with website tools. And like Square and iZettle, Shopify offers mPOS solutions and cash advances for merchants.

Buying Weebly allows Square to join iZettle and Shopify in providing customers with all three services.

Expansion Possibilities: Square can continue adding new lines of business and become a full-stack fintech company like Alibaba Group Holding Ltd (NYSE:BABA) subsidiary Ant Financial in China.

Square has already expanded from payments processing to peer-to-peer payments with Square Cash and loans through Square Capital. Dorsey is a true believer in bitcoin and he added bitcoin trading to the Square Cash app earlier this year.

The research firm CB Insights cited a patent filing from last year as evidence that Square could be getting into the crowdfunding business. According to CB Insights,  “(B)ecause it has its users’ trust, debit accounts, and transaction data, it’s not unreasonable to think Square Cash might eventually move beyond P2P payments into providing its users with other financial services, such as savings, wealth management, or insurance products.”

Millennials love tech companies like Square and Amazon.com, Inc. (NASDAQ:AMZN), and would be happy to bank with them.

Square Stock Cons

Square’s Losses Widened in Q1: As I mentioned earlier, Square remains unprofitable.  Square has yet to turn a profit, and its losses widened in the first quarter.

Square faces operates in very crowded markets. Look at peer-to-peer payments.  

If you want to send money to your friends, you can use Square Cash or another dedicated app such as Venmo, owned by Paypal Holdings Inc (NASDAQ:PYPL), or Zelle, which is owned by a group of big banks.

You can also send money via Facebook, Inc. (NASDAQ:FB) Messenger or Snap Inc (NYSE:SNAP). If you and your friends use Apple Inc. (NASDAQ:AAPL) devices, you can pay them using Apple Pay Cash. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) offers yet another alternative, Google Pay.

Square’s Valuation: As Citron Research noted above, Square stock trades at some very high multiples. Square trades at 8.4 times sales and 25 times book value.

These high valuations mean that a lot of hope is priced into the stock.

Amazon Could Strike Again: As I mentioned in November, Square fended off a frontal assault from Amazon a few years ago.

In 2014, Amazon released its own mPOS system, Amazon Register. However, this didn’t work out and Amazon retreated in 2015.

Amazon is ramping up Amazon Pay, and this could negatively impact Square. Square Capital could also face competition from Amazon Lending.

Amazon boasts more users than Square. There are 100 million Amazon Prime subscribers and 30 million Amazon Pay users. According to DMR, 2 million people use Square and 7 million use Square Cash.

Amazon’s scale, low cost of capital and willingness to subsidize unprofitable new ventures with cash from Amazon Web Services make it a very difficult competitor.

Buy Square Stock?

Is Square stock a buy?

Last November, InvestorPlace contributor Will Healy called Square “a great company that still is overvalued.”

I think that still sums it up quite well. Yes, Square is an innovative, fast-growing company. However, it has not yet earned a profit and trades at very high multiples. And it faces a formidable competitor, Amazon. 

I do see a lot of promise in the broader fintech sector.

Collecting payments data enables technology companies like Amazon or Square to sell loans and other financial services.

Ant Financial is today a financial powerhouse valued at $150 billion, more than most banks. It all began with payments.

According to McKinsey and Company, “Payments represent the beachhead for the entire banking relationship, and this beachhead is under attack.”

Square isn’t the only company using data to sell financial services. CB Insights lists four other companies that are capitalizing on this trend: Amazon, PayPal, Shopify and Intuit Inc. (NASDAQ:INTU). Some of these other companies might offer better investment opportunities.

As of writing, Lucas Hahn was long BTC, BCH and ETH.

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