Block (NYSE:SQ), formerly known as Square, has multiple weaknesses and is facing a few very tough threats. Among the firm’s weaknesses are steep competition and potential share losses due to the growth of e-commerce. And on the threats front, the company is vulnerable to a likely collapse of the crypto sector and a regulatory crackdown on Square’s Cash App. And, despite all of these points, the valuation of SQ stock is not especially attractive, even though it has tumbled nearly 30% in the last three months and 43% in the last year.
As a result of these issues, investors should sell SQ stock.
Steep Competition and Vulnerable to E-Commerce Gains
Block’s two main businesses — Square and Cash App — both face a great deal of competition. Square is the company’s payment system for retailers, while Cash App is its personal finance app for consumers.
While Square is typically identified as being well-suited for retailers to use in-person transactions, PayPal (NASDAQ:PYPL) is seen as the much better bet for online deals. Therefore, with e-commerce’s share of total retail transactions poised to climb this year, Block’s revenue growth is unlikely to be impressive in 2023.
Also importantly, PayPal is infringing on Square’s in-person business, as a significant and growing list of retailers are starting to accept PayPal in person. Although this list is comprised of major retail chains, it’s a good bet that many medium-sized retailers are also implementing PayPal.
As far as Cash App, SoFi (NASDAQ:SOFI) is rapidly growing, as its first-quarter revenue soared 43% year over year and its deposits increased $2.7 billion between the end of last year and the end of Q1. SoFi could be taking share from Block’s offering and, at a minimum, SoFi’s proliferation limits the amount that Cash App can grow.
Zelle, a banking app created by many large banks, is also growing rapidly, as its payments volume jumped 28% last year to a hefty $629 billion.
Regulators Could Come Knocking
Block enables traders to buy Bitcoin (BTC-USD) using Cash App. In recent months, Washington has launched a massive offensive against platforms that enable crypto trading.
For example, in January, the SEC charged crypto exchange Gemini “for the unregistered offer and sale of securities to retail investors” and in March, the agency issued a Wells notice to the largest crypto exchange, Coinbase (NASDAQ:COIN). As a result, it would not be at all surprising to see the SEC force Block to shut down its crypto business, which generated $35 million of revenue for the company in the fourth quarter of last year.
Finally, Hindenburg, a short-selling research firm whose allegations I’ve found to be credible in the past, issued a report on Block in March. Hindenburg, among other allegations, “accused Block of systematically ignoring fraud and theft committed using its Cash App platform.”
Block has refuted the allegations. Nevertheless, however, I would not be surprised if regulators look into the short report, creating additional difficulties for Block and SQ stock.
Valuation and the Bottom Line on SQ Stock
The trailing price-to-earnings ratio of SQ stock is a rather elevated 57x. Given the multitude of threats and weaknesses that the company faces, I believe that the shares are clearly a “sell” at their current levels.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.