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Square ( SQ ) stock plunged on heavy volume Thursday despite better-than-expected Q4 sales, as analysts worried about slowing growth in its number of merchant customers, among other challenges. Square stock was down 7.5% in early afternoon trading on the stock market today , near 11. Shares rose after hours Wednesday, following the company’s release of its Q4 earnings to a generally positive reaction from Wall Street, even though its loss widened. Square makes digital cash registers often affixed to smartphones or tablets and processes payments on those registers, which are popular among small and midsize businesses. The company also offers marketing and financial services to those clients. Rivals include payments leader PayPal ( PYPL ). The fourth-quarter results presented some issues, Wedbush analyst Gil Luria told IBD. While “the results themselves were good” and the “outlook for the year was positive,” there were a few things investors should watch for, Luria said. “One, there was the lack of merchant growth,” Luria said. On the company’s earnings conference call, CFO Sarah Friar said the company was growing by 100,000 merchants a quarter. But Luria says that’s a historical statement. “Customer growth (now) is less than 100,000 a quarter,” Luria said, adding that the company has been touting that it has “over 2 million merchants” for more than six months. In addition, Luria cautions that Square Capital — the firm’s small-business cash advance operation — is growing in an uncontrolled way, as the company is trying to lend to as many of its clients as possible. “Let’s not forget what they are,” Luria said. “It’s a subprime, small-business loan broker. You can grow quickly, but it’s not always a good thing.” Luria says Square Capital is similar in many ways to Ameriquest Mortgage, which was a major U.S. subprime lender until its 2007 closure amid turbulence in the housing market. Subprime mortgages were a big factor in that meltdown. “Square is generating loans to people who cannot otherwise borrow money,” Luria said. Since its November IPO, Square stock has been volatile. It priced at 9, peaked its first day at 14.78, and hit its all-time low of 8.06 a month ago. Square has a weak IBD Composite Rating of 43, where 99 is the highest. Luria says that one reason for the volatility is that only 10% of Square shares are available for trading. The rest are held by insiders and early venture capital investors. The lockup period for the VCs and many insiders expires May 17, which could pressure the stock. Visa ( V ) is among those that have a sizeable investment in Square. Scalper1 News
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