What happened
Well, that was fast.
Two days ago, Square (XYZ 3.18%) 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.
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.
