Square (SQ, Financial) is a merchant services aggregator, mobile payment and financial services company based in San Francisco. The company markets various hardware and software payment products, such as Square Reader and Square Register, and has expanded into small business services like a financing program, Square Payroll and Square Capital.
Shares of Square plunged more than 40% over the last two weeks, putting it on track for its biggest daily loss ever. Square lost about 14 cents per share on a net loss of $379 million. Analysts expected the company to lose about 9 cents per share on a loss of around $343 million.
However, while the unexpected wide loss might have contributed to the selloff, Square's business continues to grow rapidly, and the company increased its outlook for the current fiscal year.
Every segment of Square's business experienced strong growth in the first quarter. Its gross payment volume, which shows the value of goods and services purchased making use of the Square's Readers, increased to $10.3 billion, up to 45% on a yearly basis.
Adjusted income, which excludes transactions processed at Starbucks (SBUX, Financial) (the partnership between the two companies will end in the third quarter), came in at $146 million – up 64% on a yearly basis, which beat the $132 million to $137 million the company had anticipated.
Square's adjusted EBITDA came in at a $9 million loss, which bettered last year's $20 million loss. Again that was at the better end of the $11 million to $9 million loss range Square provided in its earnings release.
However, the stock is expected to witness an overflow of shares in the market in the near future as investors begin to trade in lockup shares. During the 2015 IPO, Square offered just 27 million shares to the market, and now there are another 259.9 million shares that could be dumped theoretically in the market.
The size of Square's lockup expiration casts an incredible amount of speculation and doubt on Square stock, as investors will question how many of those shares will be sold, thereby creating selling pressure.
And obviously, when there are more sellers than buyers, the stock falls. With Square stock, there is the potential for a huge degree of selling pressure following its lockup expiration. It is important to note that approximately 55.4% of Square shares are owned by 13 insiders. This could massively affect the true valuation of the stock based on stock price, especially when there is increased trading activity by insiders.
Taking a look at the competitive landscape for Square, the market has drastically changed since most of these early investors bought into Square stock. So it shouldn't surprise investors if many are looking to make an early exit.
It's also essential to have in mind how the POS and mobile payments industry has drastically evolved. Since its establishment six years ago, Square has only faced serious competition from online payments market leader PayPal (PYPL, Financial). However, many companies have since launched their own smart payments products including industry tech giants.
For instance, there is Apple's (AAPL, Financial) Apple Pay, Amazon's (AMZN, Financial) Amazon payments and Samsung's (SSNLF, Financial) Samsung Pay while credit card companies like Visa (V, Financial) and MasterCard (MA, Financial) are also very much part of the companies battling for domination in the revolutionized payments industry. In order words, the POS landscape has evolved.
Market analysts are becoming less optimistic on the Square, and this cannot be good for the stock in terms of market sentiment. WedBush analysts downgraded Square to underperform from neutral a day after the company reported a wider-than-expected first quarter loss with operating cost jumping 72%. Based on the current outlook, it appears as though Square might not be able to hit its own profit targets, and growth might decelerate as competition heats up.
Conclusion
Shares of Square may appear very attractive to buy given the recent plunge. However, it is important to analyze the company deeper and with an open mind. The company now faces more competition from competitors who also have much bigger ecosystems within their reach.
As time goes by, the POS market is going to become more competitive as more companies come in. Merchants are also launching their own customized payment products with several benefits that Square may not be able to match.
In addition, given the number of shares the insiders and institutions may sell in the market in the near future, now may not be the right time to invest in Square.
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