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1 Millennial-Focused Stock to Avoid No Matter What

By Rick Munarriz – Aug 30, 2020 at 11:00AM

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There's a hot app making it easy to settle up on transactions, but that doesn't mean the company behind the platform deserves a spot in your portfolio right now.

Millennials love Square (SQ -1.63%). The next-gen payments processor has made it easy to settle up on transactions. It's not the only game in town when it comes to cash-free exchanges of funds, but its market is clearly on the ascent. Square's commerce platform helps upstarts and other indie businesses process payments the way giant merchants do, and the Square Cash app is skyrocketing in popularity. It embraced cryptocurrency before other financial services giants warmed up to the new bitcoin normal. 

Who can hate on Square? Who can bash a stock that is the second largest holding of Global X Millennials Thematic ETF (MILN -2.10%), an exchange-traded fund that invests in companies widely used by millennials? I realize that most of the commentary you find on this site is bullish on Square. I respect that, but I have my concerns. I see Square as a millennial-focused stock to avoid, and I'll take my lumps and tell you why I feel that way.

A Square transaction taking place at a bicycle shop.

Image source: Square.

Square pegs

Wall Street's loving Square these days. The stock hit another all-time high on Thursday, and the shares have more than quadrupled since the March pandemic sell-off lows. This would seem to be a great time to buy into a company that plays right into the digital transactions market that's booming. 

Online and app-based transactions are as popular as ever. I mentioned earlier that Square was the second largest portfolio position of Global X Millennials Thematic ETF. The largest position is niche leader PayPal (PYPL -2.96%). This is seemingly a great time for the Venmo and Cash apps that PayPal and Square champion, respectively. The problem here is that Square's stock has outpaced its fundamentals over the past few months. 

Square's revenue soared 64% in its latest quarter, and that's the strongest top-line growth that it has posted in its nearly five years as a public company. The growth is coming from the healthy growth spurt with its Cash app that has now topped 30 million monthly transacting customers. 

It may seem hard to knock a company doing so well, but keep in mind that the stock is already a 17-bagger since going public at $9 in late 2015. Square's success with its app is commendable, but the company itself isn't immune to the pandemic. It does fuel a lot of small businesses around town, and a lot of them are suffering through the COVID-19 crisis. The gross payment volume of $22.8 billion it registered through the second quarter is its softest showing in more than a year and 15% below where it landed in the prior year's second quarter.

It's hard to justify buying Square instead of PayPal. If the crowd that Square's Cash app draws is impressive consider that PayPal services 346 million active users. The 21.3 million net new active accounts that it added during the months of April, May, and June -- a record for PayPal -- is more than two-thirds of all of the active Cash app base. 

Square is obviously a quality company, but it's not the market leader. It's suffering alongside its merchants on that front, and that's not going to get better anytime soon. Many of the Square-swiping businesses aren't going to open back up on the other end of this pandemic, and we do happen to be thigh-deep into a messy recession. 

Millennials love fintech, and right now one can argue that we're all millennials with our warm embrace fo cutting edge payment platforms. However, Square's stock has risen too high with a lot of its success riding on sputtering local economy and volatile bitcoin trading. Paypal's Venmo -- processing $37 billion in total payment volume in the second quarter -- is the real shining star. I would avoid Square until its merchant business gets back on track or the stock retreats to the point that it's a compelling value for investors again. 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and Square and recommends the following options: short September 2020 $70 puts on Square and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$86.07 (-2.96%) $-2.63
Block, Inc. Stock Quote
Block, Inc.
SQ
$54.99 (-1.63%) $0.91
Global X Funds - Global X Millennials Thematic ETF Stock Quote
Global X Funds - Global X Millennials Thematic ETF
MILN
$25.64 (-2.10%) $0.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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