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Why Square Stock Slumped 5% Today

By Rich Smith – Sep 17, 2020 at 11:54AM

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Easy come, easy go. It took the fintech company's shares just two days to make a complete round-trip.

What happened

Well, that was fast.

Two days ago, Square (SQ 0.52%) stock enjoyed a brief moment in the sun, shooting up by 7% on news that the company had launched a new virtual payday lending service called "On-Demand Pay" which will allow users of its Cash App to draw upon their expected wages in advance "for a small fee."

However, Square has given back all of those gains -- and more.

Chalkboard drawing of stock chart arrow going up being erased and pointing back down

Image source: Getty Images.

So what

Shares of Square stock fell 2.2% in Wednesday trading, and were down a further 5% as of 11:50 a.m. EDT Thursday -- less than they were trading for before the company unveiled its payday lending service.

This is a curious development, to say the least.

Just yesterday, investment bank Mizuho mused that Square's new short-term lending initiatives could potentially grow the company's gross profits by 10% all on their own. Even charging an annual percentage rate of just 60% to 65%, Square's new service would easily undercut the business model of traditional payday lenders, which routinely charge APRs in the neighborhood of 400%.

One imagines that such an option would prove popular among cash-strapped borrowers -- and steal significant market share in that lending niche.

Now what

In Mizuho's view, Square's new On-Demand Pay option only reinforces the attractiveness of Square stock, which the analyst values at $225 per share, and recommends buying.

As for me, while I cannot defend the stock's current valuation of more than 200 times trailing earnings, I do agree with the broader point that Mizuho made -- On-Demand Pay will be a growth driver for Square, and it's a more attractive investment with this new option than it was without it.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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