Text size

Square’s most steadfast bear is increasingly worried about the company’s interest in the lending business. Square stock plunged about 10% Monday following his report, before closing down 8.5% to $86.06 per share.

BTIG analyst Mark Palmer expressed skepticism about the company’s latest move, which will let consumers obtain credit from Square (SQ) to make big-ticket purchases from some sellers. Square last week announced the launch of Installments, a customer-lending option that provides loans of $250 to $10,000 for those its algorithms deem creditworthy.

Palmer argued Monday that Installments “adds to Square’s overlooked credit risk.” He’s long been concerned about how Square Capital, which once just focused on merchant lending, would fare during a downturn.

Newsletter Sign-up Barron's Tech A weekly guide to our best stories on technology, disruption, and the people and stocks in the middle of it all. PREVIEW

“The company’s increasing dependence on the extension of credit to its customers to spur its growth has made its business model increasingly vulnerable to volatility in the credit markets,” Palmer wrote.

A Square spokesperson said that the main goal of Square Installments is to help the company’s sellers grow. The company also said that its risk management is based on real-time data and that the loans are typically of smaller sizes and shorter durations than traditional business loans.

Square Capital is a fast-growing area of the payment processor’s business, and the company said that it facilitated $390 million in loans during the June quarter, up 22% year-over-year. Capital is part of Square’s subscription-and-services segment, which grew revenue 127% in the company’s last-reported quarter.

Square’s “expanding dependence on credit as a driver of growth ultimately will weigh on its multiple,” Palmer wrote. He’s maintained his bearish stance throughout the stock’s big rally: He established his sell rating and $30 target back in late November, and the stock has more than doubled since then.

His price target is the lowest listed on FactSet. Just four of the 37 analysts who cover Square shares rate them at sell.

Also on Monday, Buckingham Research analyst Chris Brendler chimed in on the launch of Installments, taking a more positive view. The emergence of a consumer-lending product “only reinforces our previous bull case thesis” that Square’s high-margin services offerings will continue to drive substantial growth, he wrote.

Brendler kept his buy rating and $105 price target on the stock.