Why is Square down 56% in the last month?

The payments disruptor is down 56% compared to the S&P’s loss of 29%. Why is Square faring twice as bad as the rest of the market in this sell-off?

2020 was looking to be a great year for Square (NYSE:SQ). They had grown their valuation by 34%, they posted growth across all sectors for 2019, its Cash App narrowed the gap in users to its main competitor, Paypal’s (NASDAQ:PYPL) Venmo, and the stock had reached its highest point since October 2018.

That was until the fastest bear market in history occurred.

While a select few stocks remain immune to the coronavirus, the vast majority saw a significant sell-off. Few more so than Square, which has seen its valuation cut by 56% in the space of a month. Why has the stock taken such a hit?

The effect on small businesses 

The primary concern for many investors is the oncoming recession which the coronavirus looks set to cause. As traditional retailers, restaurants, theatres, and factories are being forced to shut down, the dreaded ‘R’ word is looking more and more likely. While this will obviously have an effect on all businesses, there is a certain subsection that will feel the impact more than most: small, independently-owned businesses. The same type of companies that Square built its business on, the mom-and-pop shops, the independent retailers, and the pop-ups are the ones most likely to lose it all as shelter-in-place orders are being administered across the U.S.

CEO Jack Dorsey, who also has a side gig running Twitter (NYSE:TWTR), and co-founder Jim McKelvey formed Square as a solution for these small businesses who couldn’t, at the time, accept credit card payments. They are the foundation of this multi-billion dollar payments processor. As these businesses are forced to lock their doors, the sad fact is that many will not be around to reopen them by the time this virus passes. Much like Square, Visa (NYSE:V) and Mastercard (NYSE:MA) have also seen a sharp decline in value due to the virus as investors see an extended dip in gross payment volume. However, their recovery will be much faster due to their lack of exposure to at-risk businesses.

The fact of the matter is that Square’s seller ecosystem, which it has cultivated for years, will take a big hit over the next few months, and it will take a considerable time to rebuild it.

What does the future hold for Square?

Square had over $1 billion in cash at the end of 2019 — money it will need for the tough times ahead. However, I see this point in Square’s trajectory as a very large speed bump rather than a roadblock. Their cash reserves, diversified product offerings, strong leadership, and disruptive technology have not evaporated overnight. It also just received approval to operate as a bank from 2021, which will only add to its range of services.

We’re big fans of Square here at MyWallSt. This remains the same business it was in January, and for those investing with a long-term mindset, this could be the opportunity to pick up a solid company at a discount.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.