Square IPO: Is Square or PayPal Holdings Inc. a Better Investment?

Square IPOSquare IPO Major Threat to PayPal Stock

PayPal Holdings, Inc. (NASDAQ:PYPL) has been the biggest kid on the playground for a long time when it comes to mobile and electronic payment systems, but there’s a newcomer in town that could topple PayPal stock. Square Inc. is a financial services e-commerce firm that recently filed for an initial public offering (IPO) and could give PayPal a run for its money. With a Square IPO on the books for 2016, PYPL stock is at risk.

I can’t imagine what the world would look like without PayPal. I mean, seriously, how did people manage before the Internet? And how could the Internet survive and thrive without a viable means of payment? PayPal was the pioneer we all sorely needed.

But that doesn’t exempt PayPal from the rules of capitalism. A Square IPO will bring more competition to PayPal than it’s ever experienced before. Personally, I think that’s a good thing for PayPal and customers could benefit from increased competition.

The Square IPO is estimated to range between $11.00 and $13.00 a share, bringing the company’s valuation to a cozy $4.2 billion. By contrast, PYPL stock shares are worth more than ten times Square’s IPO price. However, it’s possible that Square is just playing the expectations game. (Source: “Square IPO set to price Wednesday in highly watched deal,” Reuters, November 18, 2015.)

Square IPO vs. PayPal Stock

PayPal’s stock could be somewhat insulated from a Square IPO. Jack Dorsey, the CEO of Square, was also a co-founder of Twitter, Inc. and has now returned to his first company to help it pick up some steam. Dorsey is reportedly also going to be continuing as CEO of Square through its IPO process, meaning he’ll be CEO of two firms at once.

Dorsey’s divided attention has caused some concern among investors regarding how well the Square IPO will truly go. PYPL stockholders may catch a break if the market starts to doubt the future of Square, but investors shouldn’t bet on it; there are too many factors at work here. After all, when the Internet was still blossoming, PayPal was sold to eBay Inc., as that was the only way for the payments company to flourish. The Square IPO will change all of that.

Since its original sale to eBay, the amount of money consumers spend online has dramatically increased, giving eBay the freedom to spin off PYPL stock. Consumers grew comfortable with the idea of buying things online, opening the gate for a sophisticated payments market that begins with the Square IPO.

In that way, the upcoming Square IPO is more important than it first appears. Seeing both the upcoming Square IPO and PayPal’s spin-off from eBay in the same year is a sign of tectonic changes in the market. These actions represent a fundamental shift in how consumers pay for things.

Unlike PayPal, Square actually sells hardware terminals to improve the physical payments process. Small business owners, for instance, can sign up to Square to improve their point-of-sale terminals. Square sells an “iPad” stand, too, that has a built-in slot for swiping credit cards. It is integrated with the Square app. (Source: “Products,” Square Inc. website, last accessed November 18, 2015.)

Businesses and individuals wishing to use Square for payment processing can receive a free credit card reader that plugs into a smartphone’s headphone jack just by signing up with Square online. Through this device, Square turns regular mobile devices into payment terminals, then using the Square app to process and complete the transaction.

Why PayPal Stockholders Should Worry About a Square IPO

A Square IPO would give the company more cash for marketing opportunities that are necessary to its survival. Like all payment systems, the success of Square depends on how widely it is accepted. PayPal better beware.

Right now, there’s no question that PayPal currently reigns as king of online payments. However, Apple Inc. and Alphabet Inc are also getting into the business with “Apple Pay” and “Android Pay.” Between these two apps and Square’s processing software and devices, PayPal has a huge battle ahead. Will PayPal make it through the melee?

History has shown us that firms that tie their software offerings to hardware are more likely to flourish. Think Amazon.com, Inc. and the Kindle or Bloomberg LLC and the “Bloomberg Terminal.” Square is mimicking that strategy.

I don’t have a crystal ball, so there’s no telling for sure what will happen to PYPL stock after the Square IPO. However, the evolving dynamics of the industry indicate that PayPal stockholders should be very worried about Jack Dorsey and Square.

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