PayPal Holdings, Inc. Could Be More Profitable Than SQ Stock
It’s finally happened! Silicon Valley payments processing startup Square, Inc. (NYSE:SQ) made its stock market debut on Thursday at a modest $9.00. In its first intraday of trading, SQ stock soared more than 50%. The question now troubling the average investor is this: is Square stock really worth putting your money in or is PayPal Holdings, Inc. a better alternative? Here’s how I view it.
Square vs. PayPal Will Be Biggest Battle of 2016
Ostensibly, Wall Street is notorious for preying on investor naivety. The wolves are known to hunt in Silicon Valley for startups that can raise billions on the market for them. They refer to these startups as unicorns. A big question mark on these highly valued unicorn IPOs is whether the underlying stock has the ability to eventually grow into its valuation. In most cases, investors are left disappointed. A classic example of this that comes to my mind is Box, Inc. (NYSE:BOX), which went public earlier this year. Investors who bought into this overhyped unicorn greatly suffered after their investments tanked and they are still awaiting a rebound.
There’s no denying the fact that Square has come a long way from its day of inception seven years ago. From catering to small businesses with no credit-card processing terminals to international giants like Starbucks Corporation, Square has seen gargantuan growth. The problem, however, is that as a long-term value–seeker, I can’t overlook the fact that after being in business for so long, the company hasn’t been able to churn out a single penny in profits.
If I were to invest in the industry, I would rather go with the profitable player. In this case, that’s PayPal. PayPal has been around for much longer and its name resonates with merchants worldwide. Its wider scope and mature services give the company an edge over its industry competitors. Plus, industry dynamics are changing fast with more players, and bigger ones at that, including the likes of Apple Inc., Alphabet Inc, and Amazon.com, Inc. With these major players entering the market, chances are that the smaller players, like Square, won’t survive over the long haul. The only plausible way forward for the smaller players would be to remain in consolidation.
Another real challenge currently at hand for Square is the divided attention of its CEO. I completely agree that as analysts, we have been going on and on like a broken record about how bad dual-CEOship can be for the two companies. However, this broken record has to keep going, because this issue cannot be downplayed, given that Jack Dorsey has already got his plate full with Twitter, Inc.’s problems. Can a CEO really save two stocks at once?
The Bottom Line on SQ Stock
By pricing it lower and cutting its shares down further, the company has successfully sent a signal to the market that the stock is undervalued, so buy in now. But until I see a turnaround in Square’s business, I’ll be waiting on the sidelines.
I rest my case with Buffett’s words, leaving it to my readers to draw their own conclusions: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders/investment banker) to a less-knowledgeable buyer (investors).”