Square Stock Is Plunging After a Steadfast Bear

Square Stock Is Plunging After a Steadfast Bear Raised a New Alarm

https://www.barrons.com/articles/this-square-bear-doesnt-lik…

BTIG analyst Mark Palmer expressed skepticism on Monday about the company’s latest move, which will let consumers obtain credit from Square (SQ) to make big-ticket purchases from some sellers. … Palmer argued Monday that Installments “adds to Square’s overlooked credit risk.” He’s long been concerned about how Square Capital, which once just focused on merchant lending, would fare during a downturn.

Also on Monday, Buckingham Research analyst Chris Brendler chimed in on the launch of Installments, taking a more positive view. The emergence of a consumer-lending product “only reinforces our previous bull case thesis” that Square’s high-margin services offerings will continue to drive substantial growth, he wrote.

Brendler kept his buy rating and $105 price target on the stock.

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There’s definitely risk with lending, but the impression I have of Palmer is that he hasn’t read up on how Square is approaching lending.

Square is using data from many years of transactions and AI to help make these lending decisions. I’m also confident that management won’t expose Square to too much lending risk.

This model is so completely different from traditional lending that I don’t blame Palmer for completely missing the mark with his rating.

Again, I think this is a benefit of following 10-12 companies closely.

From Square’s press release:

“For most sellers, providing a payment option like Square Installments to their customers has not been possible.”

– Strengthens Square’s core offerings and relationship w/merchants

“We’re focused on removing the complexity associated with financial products, enabling more businesses to access incredible tools that can help them grow. Research shows access to an offering like Square Installments can significantly grow sales. In fact, 68% of consumers said they would be more likely to consider a small or local business if it offered financing options2."

– Helps Square merchant’s businesses grow sales which drives more revenue for Square in addition to interest collected from the loans.

“Square Installments is currently available to customers at participating Square sellers in 22 states for qualifying purchases between $250 and $10,000.”

– These are not $100k plus loans. Therefore there shouldn’t be too concentrated of exposure in a few big loans. Square can use AI/ML to spread-risk across regions and business sectors.

https://squareup.com/about/investors/press/407f4b4f-dc3d-42d…

I think this is a good move by Square. I trust their management to keep risk manageable. That’s what this comes down to.

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There is, however, a difference between lending money to the merchant, for whom SQ has a significant history of cash flows, and lending money to the customer, where there may be little history.

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I think the risk of lending transcends using years of data and AI. The history of lending is that lenders get more and more aggressive, and confident as they have all the data, and then when a real recession hits…boommmmmm!

All the data in the world does not account for things. That is why banks usually require collateral, and credit card companies charge high interest rates and put lending limits in place for most.

Even the best credit risk can, at no fault of their own and with the desire to pay, default because they simply have no choice in a real recession.

Therefore, it is an added risk, and if it is an area that Square has to move into in order to maintain its growth, then it is moving into a higher risk business than its other businesses.

Many companies like AMEX and VISA have done quite well in the business, through ups and downs and vagaries of the economy. So Square might as well if they create a business model that allows for it.

But do not rely on AI and data itself to bail the company out in a true recession. No amount of data includes credit risk in such circumstances.

Tinker

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But do not rely on AI and data itself to bail the company out in a true recession. No amount of data includes credit risk in such circumstances.
I’m a big believer in the future of AI/ML. But I also believe it is the future, not the present. And if people believe that AI is going to save Square from defaults then I need to seriously question that. Tinker is correct, this is increasing the risk profile of Square.

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This is why I started having doubts about SHOP-when it started lending. It is often the black swan that hits the lenders when things turn. Or, maybe black swan is not exactly the correct term, as it is meant to mean something out of left field that can’t or would normally not be modeled.

SQ wants you to believe they have better info because they see receipts coming in. Are they seeing all loan agreements for every loan that every company has out? Are they seeing the financial pictures, balance sheets of their customer’s customer which might account for 80% of sales?

Funny things happen when sh&t hits the fan. And funny risks are taken when there is pressure to make the quarter.

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Don’t agree. Some analist jumps on the bandwagon, naturally with most tech falling and wants this price much lower…don’t they all. If you believed in it all the way up, then believe on the way down and you have decisions to make. Do nothing. Add. Sell. Simple, but don’t panic. This applies not just for Square but for all our stocks. We have all been there. It goes up, it goes down. As life does…

Onwards…

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Don’t agree. Some analist jumps on the bandwagon, naturally with most tech falling and wants this price much lower…don’t they all. If you believed in it all the way up, then believe on the way down and you have decisions to make. Do nothing. Add. Sell. Simple, but don’t panic. This applies not just for Square but for all our stocks. We have all been there. It goes up, it goes down. As life does…

Onwards…

I’m with you branmin, nothing has changed about SQ other than someone’s opinion that was made public and caused an excessive drop on a bad day anyway. I added another batch today to my SQ position, at the highest price I’ve bought it at, it’s now my #4 holding…I think it will pay off down the road.

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I might be thinking of this too simplistic. To me, it seems this only really matters if it becomes too much of Square’s business. IE if it changes who they are and what they do.
Last earnings, Square capital had funded $390 million in loans. This was against $815 million in revenue.
So it is approaching 50%. The question to me is, How much is too much in loans? And, Does this change their business, or just add to it?
Of course we have to factor in risk of lending money. If I understand correctly, these are much smaller consumer loans, not the big loans made to businesses. To me, that mitigates some of the risk.

I am content to wait until the next earnings report to find out a little more.

Please let me know if I am looking at this too much “big picture” or not seeing something obvious.

Kevin

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nothing has changed about SQ other than someone’s opinion that was made public

That’s just not the case. Something significant has changed, SQ has gone into the consumer lending business. They did not offer this product previously. I’m not predicting doom. I think Dorsey is an intelligent and actually cautious CEO, but to assume that nothing has changed and fail to recognise that consumer lending increases SQ’s risk profile is naive.

The question one needs to ask is what is the risk/reward trade-off. I’m sure Dorsey asked that question. As I understand it, SQ not only limits the maximum loan, they also qualify the buyer based on their collected experience with that individual. I do not know a lot of other factors. For example, I do not know if the borrower is constrained to $10,000 max for all lending activity or does the limit apply to each individual purchase? In other words, could the same borrower make several large tick credit purchase well exceeding $10K? I don’t know. Does SQ use other traditional credit checks from one or more of the big 3 credit research firms when qualifying the buyer or only their own experience with the individual? I don’t know.

Maybe SQ has made information about this process public, if so, I’ve not seen it.

But given what I do know at this point it appears that SQ is entering this business carefully. They have limited the geographic reach, they appear to have limited the overall amount of loans they are willing to provide. So it looks like the entering this new venture incrementally in order to gain real world experience. Obviously, that experience will be used as feedback to enhance the practice.

I’m long SQ and I’m not selling. I’m not buying either, but not because of the added risk of consumer lending. I am not uncomfortable with this given what I know (and don’t know). I’m not buying because SQ is my largest single position (even with the recent pullback). I don’t have cash (other than my protected “rainy day fund”) to deploy. I’d like to get some answers to the questions I have.

But, if I can find satisfactory answers in a timely fashion, I might take a hard look at everything else I hold and trim some here and there in order to pick up a few more shares - I’ve just not done that yet.

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I’m unsure why folks are surprised. Square has been very open and forthcoming with its intent to offer lending products to underserved and small businesses.

Recall not long ago they were pursuing a banking application for this precise purpose (withdrawn to bolster application in July)

https://www.americanbanker.com/news/square-quietly-withdraws…

Long SQ, and like Brittlerock, not adding as it’s my largest position

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SQ will sell almost all its loans. At the beginning, they will experiment a certain amount to make sure their loan default rate is low so they can eventually sell at a good price.

https://www.marketwatch.com/story/square-to-let-customers-pa…

Reses said that Square had “very small exposure on its own balance sheet” to debt from the merchant-lending business, noting that the company had $85 million in “loans held for sale” on its balance sheet as of its latest quarterly report. While Square packages and sells many of its merchant loans to third-party investors, Reses said that Square “typically pilots all of our products on our own balance sheet” and will do so with Installments.

“We want to make sure we’re comfortable with the risk before we sell to investors,” Reses said. “That incentivizes us to build the best models and the most insightful models because we share the same risk investors do.”

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This is an excellent strategy; Square is working all sides of the transaction.

SQ is lending via SQ Capital to vendors using data it has on vendors and AI.

SQ is about to facilitate lending small amounts to consumers using its own data and regular credit reports. Recall millions use them as a bank and this number is growing.

The best part of this strategy is SQ sells these loans and earn more money because these are lower risk loans.

So SQ help sellers sell more, buyers buys more, then sell loans, take a small percentage off from all three sides for themselves, what not to like? This is brilliant!

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Me:

nothing has changed about SQ other than someone’s opinion that was made public

Brittlerock:

That’s just not the case. Something significant has changed, SQ has gone into the consumer lending business. They did not offer this product previously.

True, SQ will be getting into the consumer installment payment plans business, but that has been known since last Wednesday! What I was saying is the 10% drop TODAY was because of the analyst bringing this up as a risk (in addition to some big tech downdrafts today which affected many of our stocks, anyway).

I’ve known about this risk for 5 days, and I think it’s a GOOD risk! I think it will help the business expand their growth! So the 10% drop today was on no NEW news in my mind, was solely the lemmings following an analyst’s opinion, so that’s why I added. It was the right thing for ME to do in MY situation. SQ is NOT my largest position, but I would like it to be a little larger, so I took this additional 10% drop as a great time to add to my position and bump it up a spot from #5 to #4…on no new news.

Only time will tell if it was a good move or not, but I won’t lose any sleep over adding to my SQ position on a down day.

PS - I also saw tonight that some of today’s move may have been because Dorsey sold a bunch of shares, I consider that even LESS of a reason to be concerned. There are many reasons to sell, I doubt very much there was anything nefarious about his decision to unload some shares at this point in time.

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So the 10% drop today was on no NEW news in my mind, was solely the lemmings following an analyst’s opinion, so that’s why I added.

One must be careful not to confuse causation and correlation.

Fact: Analyst offered a negative opinion on Square’s consumer lending business.

Fact: The stock price (yesterday’s close to today’s close) dropped $8.05 or 8.55% (not 10%).

Some people assume that the stock price dropped because of the published report of the analyst’s opinion. No one can know that for sure. But we can look how other stocks faired today.

SHOP: down 3.51%
PYPL: down 3.16%

The above 2 companies are somewhat similar to SQ in their businesses.

Other non-profitable (although SQ is pretty much profitable) fast growing companies that we follow also dropped today:

NTNX: 5.40%
AYX: 2.47%
TWLO: 3.30%

I would venture to say that SQ would have likely dropped at least 3.5% or so regardless of any analyst opinion. So in all likelihood the analyst opinion MAY have caused a 5% drop today. Maybe, maybe not.

Making a decision on this logic alone doesn’t seem prudent to me. I’m not saying that adding to SQ today was necessarily a poor choice; that all depends on the circumstances. But that’s just my opinion.

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Hey there !

I think similar to GauchoChris on this.

I don’t call this drop a “plunge”. It’s only 8+% … so big deal. It’s a correction with the rest of the market. Get used to it people.

Rich (haywool)

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There’s definitely risk with lending, but the impression I have of Palmer is that he hasn’t read up on how Square is approaching lending.

I can promise you that this is not true. Mark’s opinion may be right or it may be wrong, but he’s done the work.

For those replying that SQ is just warehousing the loans until they can sell them, that strategy works great until credit markets seize up, and then they’ll be stuck with them, just like every other lender [almost every] in the past recession. These loans will undoubtedly be harder to move than, say, prime mortgage loans were.

Long SQ,

Naj

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Did anyone else watch the recent SQ San Francisco publicity circuit where their CFO, Sarah Friar, talked about their AI management of credit?

When the floods recently hit the South, the system automatically started lowering the amount of credit offered because of the localized changes in the business environment. That’s a system that is relatively sensitive to data inputs. Now imagine this on a grand scale. SQ likely knows there are negative changes to the economy before they even show up in generalized stats.

In my opinion, this should offer considerable protection from offering too much credit in a downturn. Particularly if SQ is your bank.

Currently painfully long SQ and most of the other high growth stocks on this board.

Chuck

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