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Square returns to reality on Monday, after a research badyst lowered the rating to "sell" and declared his rally of more than 200 percent this year "exaggerated."
A series of "hit and raise" quarters have helped catapult shares in the payments company, a creation of Twitter founder Jack Dorsey that became public in late 2015. He has also taken advantage of the buzz created by his decision to allow users of its Square Cash application to buy and sell Bitcoin, the popular encrypted currency.
But BTIG badyst Mark Palmer said in a note on Monday that Square could have exceeded the mark.
"(W) we believe that the valuation of SQ reflects a resounding and unimpeded growth, while not taking into account the macro competitive, credit and macro risks that did not disappear when some investors suddenly saw their actions as a play of a modern cryptocurrency, "he wrote, lowering his ra The action helped Square's shares fall more than 11 percent to $ 43.41, putting them on track for their biggest one-day drop since May. 2016. While a major blow, the company's shares continue to rise 221% so far this year, according to Thomson Reuters data.
Palmer acknowledged in his report that Square's recent growth has been impressive, but that it is barely immune. of the Clover and Clover Go competition from First Data Corp, a mobile debit and credit card reader; and Vantiv, a payment process company.
He also raised an eyebrow at a $ 3.4 million charge taken in the third quarter of 2017 regarding the "growing and growing maturity" of his Square Capital loan portfolio, and "continued refinements of inputs for our methodology of estimation of credit losses ". Square maintains only part of the loans it originates, according to the note, reducing its direct exposure to losses, but the charge still indicates the impact these loans have on Square Capital's operating model.
Square also announced in September that it would seek a letter of industrial loans to provide a source of financial funding for Square Capital and allow it to expand into other financial products. As his biggest rival Paypal has sold its US consumer loan portfolio, Square seems to be moving in the opposite direction, "looking to increase its dependence on credit as a driver of growth," Palmer wrote.
The company could also be prepared for a crash if Bitcoin goes out of style, or if the benign environment for the small businesses it serves is suddenly reversed, for example, if Congress does not enact tax reform and offers early breaks to those customers.
For now, the risks surrounding Square seem to be held back, as merchants of all sizes invest in new payment technologies. But the stock market crash suggests that Wall Street is taking Palmer's skepticism seriously.