For Square Inc (NYSE: SQ) investors, 2017 has seemed like a dream. Unfortunately, BTIG analyst Mark Palmer says it’s time for the market to wake up.
Square stock, which is up an incredible 245 percent year-to-date, fell more than 3 percent Monday after BTIG downgraded the stock from “neutral” to “sell.” Palmer says the stock has simply gotten too overheated at the moment and investors are not fully appreciating the risks the company faces.
Square has consistently delivered revenue growth above 20 percent in 2017. The company has also beaten consensus estimates and raised guidance multiple times. However, at its current valuation, Palmer says impressive growth and an optimistic outlook are fully reflected in the stock.
“We believe SQ’s valuation already reflects emphatic and unimpeded growth while failing to factor in competitive, credit-related and macro risks that did not go away when some investors suddenly viewed its shares as a play on a trendy cryptocurrency,” Palmer says.
Earlier this month, Square announced that it is testing a feature with a handful of its Square Cash customers which allows them to buy and sell bitcoin. Palmer says the potential impact of a successful bitcoin trial would be marginal at best for Square, whereas the experiment adds unnecessary risk to the stock by tethering Square’s fate to the risky and extremely volatile cryptocurrency market.
Finally, Palmer questions Square’s recent decision to seek an industrial loan charter that would help facilitate Square Capital’s expansion into additional financial products. Competitor Paypal Holdings (PYPL) recently chose to reduce its credit risk by selling its U.S. consumer credit receivables portfolio.
“Just as we suggested that PYPL’s move to reduce credit risk should be supportive of its stock multiple, we believe SQ’s expanding foray into credit likely will weigh on its multiple,” Palmer says. He says…
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