Square, Inc.: 3 Things Keeping Down Square Stock

Square StockSquare Inc (NYSE: SQ) stock will celebrate its one-year anniversary as a public company on November 19. Investors lucky enough to get an allocation of Square stock on the IPO have about a 28% gain. Those who missed getting an allocation and bought on the opening have a small loss that I’m going to call a wash. SQ stock was priced at $9.00 and opened at $11.20 on its first day of trading (Source: “Square Inc,” Google Finance, last accessed September 19, 2016.)

Is SQ Stock a Worthwhile Investment?

There are three things about Square Inc that trouble me and make me wonder if Square stock is a worthwhile investment. My three concerns are Jack Dorsey himself, the company’s finances, and the fact that Square competes in such a crowded industry. Let’s talk about Jack first.

In Square’s S-1 filing, the document that discusses investment risks of a company about to go public, Square stock reported to the Securities Exchange Commission the following:

“Our future success is significantly dependent upon the continued service of our executives and other key employees. If we lose the services of any member of management or any key personnel, we may not be able to locate a suitable or qualified replacement, and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth. Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter. This may at times adversely affect his ability to devote time, attention, and effort to Square.” (Source: “Amendment No. 4 To Form S-1,” U.S. Securities and Exchange Commission, November 16, 2015.)

This wouldn’t bother me so much if Twitter Inc (NYSE:TWTR) wasn’t such a mess. As you may know, Twitter has never been profitable in all the time it has been a public company. Coincidentally, neither has SQ stock. So is it more than a coincidence that the CEO of both companies is Jack Dorsey?

My next issue with Square stock is all about their financials. Going back to SQ stock’s IPO filing, we see that when they went public, they had never been profitable. And, as I mentioned above, that is still the case today.

More troubling is that in the last quarter, Square stock burned through about $128.0 million in cash. With just about $400.0 million in cash and short-term investments, Square won’t be able to do that for very much longer. This is especially the case given that losses at the company continue to get bigger (Source: “Form 10-Q,” Square Inc, June 30, 2016.)

In the same quarterly filing, Square discusses the impact that the loss of its single biggest customer, Starbucks Corporation (NASDAQ:SBUX), will have over the near term. In my opinion, Square operates in such a competitive market that replacing the revenue generated by Starbucks will take time.

And it is this competitive landscape that presents the third concern I have about SQ stock. A year before Square Inc went public, an article was published by the credit card processor comparison web site MerchantMaverick.com. The piece compared Square to seven other mobile payment providers. The author noted that each of the other service providers fared better than Square in one or more categories (Source: “Top 7 Square Alternatives,” Merchant Maverick, November 5, 2014.)

SQ Stock Vs. The Competition

More troubling is that Square’s competitors include three giants in the credit card processing business: PayPal Holdings Inc (NASDAQ:PYPL), Intuit Inc. (NASDAQ:INTU), and NCR Corporation (NYSE:NCR). All three of these companies are bigger than Square and any one of them could easily control a majority share of Square’s mobile credit card processing business quickly if they saw value in it. But, in my opinion, that isn’t likely to happen until Square becomes profitable.

In conclusion, SQ stock may be one to watch more as a potential consolidation candidate. Otherwise, there are just too many question marks for me to get excited.