Block (NYSE:SQ) investors are in a tough spot right now. Down 67% in the past six months, SQ stock continues to drop in price. Many may be trying to bottom-fish with this fintech firm, formerly known as Square.
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But as the factors that drove its epic decline remain, buying it on weakness has been, and could continue to be, much like trying to catch a falling knife. First, there are overarching reasons why the stock has dropped, and could keep on dropping. Upcoming monetary policy changes are not favorable when it comes to its rich valuation.
Second, fintech stocks in-general have fallen out of favor. Third, CEO Jack Dorsey’s big bet on crypto hasn’t been a winning one. Only time will tell whether his vision pays off in the long run.
So, where does that leave investors? If you got into it at much higher prices, you may want to throw in the towel. Given that what drove its move to nearly $300 per share last year likely won’t repeat itself, there’s no use holding on. As two of the factors that pushed it lower could continue to weigh it down, there’s no need to buy at today’s prices.
Why SQ Stock Tanked in Price
It wasn’t just one factor that resulted in Block tumbling from as much as $289.23 per share in 2021, to around $91 per share as of this writing.
Factors largely outside its control played a big part in driving the high double-digit percentage decline in SQ stock. The Federal Reserve’s rate hike plans, which became known just after Thanksgiving, resulted in a major cycling out of growth stocks, as the market moved to names with less frothy valuations.
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Alongside this, sentiment for fintech stocks has changed dramatically. Now, realizing that much of the industry’s high growth in 2020 and 2021 was pandemic-driven, investors now have more muted expectations about this industry’s post-virus growth prospects.
That said, while you can’t blame Block for market-wide changes, you can blame management for some of the high-risk, questionable-upside strategic decisions it’s made in the past year. Mainly, the decision to pivot toward becoming a crypto-centric financial services company.
Growing Focus on Crypto Has Been a Bust So Far
In recent months, Jack Dorsey has spearheaded a big strategic change for the company, known best for its Square payment processing and Cash App peer-to-peer payments businesses. It had already been active in the world of cryptocurrencies. For instance, you can buy Bitcoin (BTC-USD), Ethereum (ETH-USD) and other major cryptos through Cash App. Also, it had invested a fair amount of its cash on hand into BTC, acquiring 8,027 coins.
But now, ith the change in its name from Square Inc. to Block Inc., the fintech firm has made it clear it sees blockchain/crypto as its ticket to future growth. Dorsey has been talking about moving into developing a new bitcoin mining system. Block has also discussed plans to build a decentralized cryptocurrency exchange.
There’s nothing wrong with Dorsey seizing opportunity in this fast-growing area. Yet now may not be the best time to ramp things up. Crypto prices have been hammered by the move to “risk-off” assets caused by the Fed’s rate hike plans. With the U.S. Federal Government inching toward greater regulation of this financial “wild west,” crypto could experience additional declines.
The market has already bid down SQ stock due to its heavier focus on crypto. If Dorsey continues to move more into this space, all while the market becomes more bearish on this asset class, the company’s hard hit shares could continue to fall in price.
If You Like Fintech, Stick to Other Plays
Block’s heavy crypto exposure isn’t the only thing that could cause it to drop to lower prices. Valuation concerns, which have put pressure on it since November, could continue to do so too. At today’s prices, shares trade for around 52x projected earnings for 2021.
By comparison, PayPal (NASDAQ:PYPL), the other more mature fintech company, trades for around 22x earnings. Don’t rule out the possibility that this stock continues to fall until it reaches a valuation more in line with its main peer.
It’s entirely possible Main Street and Wall Street investors have overreacted with their sentiment shift on fintech stocks. Once uncertainties pass, Mr. Market could warm back up to this space, resulting in a recovery.
But don’t view that as a reason to buy this name as your fintech comeback play. PayPal is a better choice for value-minded investors. If you lean more towards growth, Sofi Technologies (NASDAQ:SOFI) may be a better choice.
If you like fintech, stick to other plays, and take a pass on SQ stock.
On the date of publication, Thomas Niel held long positions in BTC-USD and ETH-USD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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