Square is a stock to avoid, this investor says

The fintech sector may have had a great year but payments company Square (Square Stock Quote, Chart, News NYSE:SQ) should be avoided, says investment manager Gordon Reid, who thinks that even with its modest gains in 2019, Square is still overpriced.

The payments processing space saw nice gains this year with companies like Visa, Mastercard and PayPal bringing in impressive returns. The ISE Mobile Payments Index, which tracks the sector as a whole, is now up 41 per cent for the year.

But Square has been a notable exception, returning 15 per cent year-to-date, not bad but still lagging behind its peers and much of the market, for that matter.

Square was looking to have a bounce-back year after a disastrous conclusion to 2018 where it lost almost half of its value over the final two months. But after rising with the rest of the market over early 2019, SQ has been a disappointment, with the stock suffering a setback midyear as investors reacted to moderated guidance from management.

But even with the pullback, the stock is still expensive, says Reid, president and CEO of Goodreid Investment Counsel, who spoke to BNN Bloomberg last Friday.

“It’s not a name that I would own. It’s range-bound. It hit over $100 at one point and it settled back,” Reid said. “It’s still trading at a very big multiple and that’s about the expectation for the future, but a lot of times these expectations are pretty buoyant and it’s tough to stay with names if they don’t come through.”

“This is a Jack Dorsey company and he has obviously been successful in disruption and the fintech revolution. They’ve got Cash App which is a competitor to Venmo which PayPal has. It’s an instant transfer of funds and a lot of younger people use it and it’s low-cost,” Reid says.

At the same time, Reid has his doubts about growth within the fintech space, as early adoption has proved to be more expensive than anticipated.

“There are still a lot of transaction costs, and, in fact, many of these groups as a backbone still use the big [platforms] from Visa and Mastercard,” Reid says.

Square’s share price responded well to its latest earnings report in early November where the company’s third quarter beat analysts’ expectations on both revenue and earnings although management’s guidance was muted.

Square’s Q3 saw revenue of $431 million, a 68-per-cent increase year-over-year, along with the company’s first quarter in the black at $20 million compared to last year’s Q3 loss of $16 million. Earnings came in at $0.13 per share versus the $0.11 per share consensus estimate.

The company announced that it is expanding its small-business lending segment, Square Capital, a potentially risky endeavour but one whose risk can be balanced by the company’s diverse product line.

Cash App has also seen growth as customers increasingly look to the payment platform as a banking service.

“We do see people use the Cash App fundamentally as you would expect them to use a bank account,” said CEO Jack Dorsey, in the quarterly press release. “They store money with us, it’s accepted anywhere Visa is accepted. They can send and receive money from friends and family.”

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