Square's IPO: Silicon Valley Finance meets Wall Street

Square IPO

Jack Dorsey, the CEO of Square, Inc and the now CEO of Twitter, has a busy month ahead of him.

Jack's second company, Square, Inc, a mobile payment company based in San Francisco, has filed for an IPO and will be listed under ticker symbol "SQ". The company is holding its roadshow this week and likely decide upon a stock price by the end of it.

According to CNBC, Square, Inc plans to trade as a public company by the week before Thanksgiving.

The Financials

The company's private-market valuation, according to its last funding round in 2014, is $6 billion.

While that is all good, Square's filings show that the company is still in the red. For the first six months of 2015, Square reported a loss of $77.6 million on a revenue of $560.5 million. Moreover, according to Square's latest third-quarter filings, the company posted a net loss of $53.9 million on a revenue of $332.2 million in revenue. The company, in all, owes debts north of $350 million.

Therefore, it is to no surprise that Rapid Ratings, an organization which rates the financial health of private and public companies, has a dismal 41 out of 100 rating for Square.

The company, nonetheless, hopes to raise about $275 million in capital through the IPO. However, that number is likely to change given that the figure was mainly used for the purposes of calculating registration fees.

Problems for Square

The interesting thing about Square's IPO is that they are debuting at a time when investors are "shying away from IPOs after stocks plunged in August amid worries about China's economy and uncertainly about the timing of an increase in U.S. interest rates" – Reuters.

Moreover, another issue, which Square happened to disclose in its filings, is that Jack serving as the CEO of two public companies, Twitter and Square, may adversely affect his ability to steer Square to greater success. This is especially concerning given that Twitter, in itself, is not faring too well.

Then there is also the issue of profitability and scalability. As highlighted before, Square is still facing losses. Moreover, given the increased competition from competitors such as Apple Pay, Pay Pal, and many others, Square's market arena is surely crowded.

Thoughts

So fellow monkeys, what do you guys think about the Square IPO? What implications do you think such a move carries for Square? Do you think going public will allow Square to expand, achieve scalability and become profitable? Or do you think Square might be better off being a private entity.

Thanks for reading guys!

Comments (8)

 
Best Response
Nov 3, 2015 - 5:40pm

I'm waiting for Aswath Damodaran to do an analysis. I still don't fully understand Square and its value add. from a consumer's perspective it seems useful but not all that different from a traditional card reader, just that there's an iPad involved which is "cool."

how does square make money? do they charge a fee for every transaction processed much like Visa and mastercard already do?

what's their target market? what type of business finds square more economical than traditional merchant services? how many of their customers end up going out of business? it seems to me they target mostly businesses who are small and don't have a lot of revenue, and that comes with its own problems. my simple mind works like this: if a company is growing rapidly and making more sales, they need more complex infrastructure (which calls for more than just one PoS or iPad plugin). if square makes its money from small companies that may not have a lot of sales (swipes), what's their possible growth path?

I know some people have made a lot of money selling to smaller companies (usually lenders), but I wonder about the viability of this business model if I'm understanding it correctly. my point is if square is simply merchant services via iPad, I worry about them as a going concern. on the other hand, they could be attractive to a bank like Wells Fargo in an effort to beef up its own merchant services, so there's always the possibility of being acquired.

it will remain to be seen, but keep expecting stuff like this as long as multiples are high, it's a good way for the jack dorseys of the world to secure retirement and help banks improve their preftige on the league tables.

 
Nov 4, 2015 - 1:44pm

So yes to pretty much all of your questions and comments....

yes they charge a fee (2.75% per swipe, which is why their registration was $275MM - kind of an inside joke)...

yes, they target a lot of small businesses....my dad and I actually used them a couple years ago (we have a small business we started when I was in 7th grade). We try to do all cash, but sometimes we have to take cards and it is actually very convenient to just plug into my phone or ipad. That being said, though, we no longer use it....paypal now has an attachment which is the same as the square attachment (PayPal Here) which we now use. I think the paypal fee is 2.7%, so obviously not a huge difference. But the big thing is the money goes into our paypal account which we use frequently

the last yes is that I don't really see their growth story....focusing on small businesses doesn't really create a large revenue stream (we probably used them for only $1-2k/yr, so they made like $50 from us)....

 
Nov 5, 2015 - 1:25am

They also provide financing to Small Businesses using proprietary information based on sales.

Not my industry but as I'm in San Francisco I feel entitled to an opinion on all things tech. Big fan of SQ.

As a consumer I would vote:

Square > Venmo > PayPal > Credit Cards > Shmeckels* > Cash

*

Fill the unforgiving minute with 60 seconds of run. - Kipling
 
Nov 11, 2015 - 8:49am
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