Square and PayPay were on opposing paths Thursday as PayPal shares ended the day up 0.60% to $75.90. Square fell 11% to $69.03.
The divergence was largely stoked by the loss of Sarah Friar, Square's chief financial officer, who announced on Wednesday she is leaving to become CEO of Nextdoor. But PayPal's acquisition's of Sweden's iZettle may be a greater long-term threat.
Brick and Mortar Battle
"Hailed as the European rival to Square, iZettle is a leading small business commerce platform in Europe and Latin America that offers in-store capabilities, including point-of-sale, merchant tools and an easy and automated on-boarding process," the Action Alerts Team wrote in their analysis of the transaction announcement.
Square, based in San Francisco, relies on its dominance with businesses to penetrate a tangential market to the peer payments that have long been dominated by PayPal, which is headquartered in San Jose. According to a Statista report, about 87% of Square's revenue comes from business-based transactions processed on the platform. If iZettle can convincingly threaten Square's business, it could take away significant market share.
A KeyBanc note penned by its Director of FinTech Josh Beck earlier this month was bullish on Square's core business working on point of sale, noting its market dominance. The firm issued an outperform rating on the stock on the basis of this dominance.
However, the note mentioned the possibility of competition eating away at Square's core payment-processing business.
Given iZettle's expertise in business payments and PayPal's larger capital base and pre-eminence in peer to peer, that competitive threat could be imminent.
The other issue for Square is the fact that iZettle is dominant in Europe and rapidly expanding in Latin America. If Square's market is cut off to apply to only domestic businesses, the bull case becomes far more constrained for the stock.
Square only launched in Europe in 2017.
"PayPal just bought Square's rival in Europe at a cheaper cost," the AAP team noted on the acquisition's announcement. "iZettle's international ties accelerate PayPal's global expansion."
So, while analysts may be confident that Square can rebound, there is reason for caution as its chief rival challenges its core business.