Square's (NYSE:SQ) stock recently hit an all-time high as smaller businesses, which generated nearly half its transactions last quarter, gradually reopened amid slowing COVID-19 infection rates and some relaxation of stay-at-home measures in the U.S.

But is that enthusiasm, which propelled Square's stock from the high $30s per share in late March to over $100 a share, justified or premature? Let's reevaluate the bear and bull cases for this technology and financial services company to find out.

Square Stand being used in a bicycle shop.

Image source: Square.

Is the COVID-19 crisis really over?

Square's revenue rose 44% year-over-year in the first quarter, which ended on March 31, but it didn't provide any guidance for the second quarter or the full year. However, its seller gross payment volume (GPV) fell 39% annually during April, with most of the decline occurring between the last week of March and the first half of April.

During the conference call on May 6, CFO Amrita Ahuja said the "trend line stabilized at these levels" and Square had seen "improving growth rates since mid-April." She noted it was "still early and we continue to see daily volatility, but we've been encouraged by these recent trends."

Those comments, along with the gradual reopening of businesses across the U.S., suggested the worst was over. However, a recent surge in fresh COVID-19 cases has sparked fears of a second wave of infections, and a growing number of states are shutting down again.

The pessimists vs. the optimists

Last quarter, Square attributed its stabilizing growth to new sellers pivoting to digital payments throughout the crisis, existing sellers using more omnichannel solutions, and seasonal boosts from Easter sales and stimulus checks.

Square for Retail being used at an apparel store.

Image source: Getty Images.

Forty-eight percent of Square's sellers generated less than $125,000 in annual GPV last quarter. These smaller merchants are highly vulnerable to the COVID-19 shutdowns, and Square has offered assistance by refunding its software fees in March and April, and providing more delivery, curbside pickup, and contactless transaction tools to help merchants stay open.

Square is willing to take near-term losses to support its smaller merchants, but it's unclear if these moves can consistently counter the broader macro headwinds -- including new COVID-19 infections and a U.S. unemployment rate that could hit 20% by the end of the year, according to a recent Refinitiv survey.

Square also remains consistently unprofitable on a GAAP basis, and the prolonged subsidization of its merchants could burn through a lot of cash, even after it recently raised cash with a $1 billion debt offering. Square's Cash App is still growing, and it remains ahead of PayPal's (NASDAQ:PYPL) Venmo, but Cash's growth isn't significant enough to offset the near-term slowdown in Square's payment processing and software fees.

Do Square's profits and valuations matter?

Analysts expect Square's revenue to rise just 4% this year as it deals with the fallout of the COVID-19 crisis, but accelerate to 33% growth next year.

Its adjusted (non-GAAP) earnings, which exclude stock-based compensation and other variable expenses, are expected to plunge 68% this year but more than triple next year.

At $100 a share, Square trades at over 100 times next year's earnings. PayPal, which is firmly profitable but is growing at a slower rate, has a much lower forward P/E of about 50. Square commands that premium because the market is pricing in the end of the COVID-19 crisis and the broader recovery of small businesses -- neither of which is guaranteed at this point.

Waiting for a pullback is a better idea

I bought more shares of Square during the COVID-19 crash earlier this year since I'm still impressed by the long-term growth potential of its fintech ecosystem. However, I believe its stock is overheating again, and investors who accumulate too many shares up here could be burned by a second wave of COVID-19 infections and shutdowns.