Think Investing in a Square IPO is a Good Bet? This Will Change Your Mind
Investors are gearing up for the hotly anticipated Square IPO. Will the stock be a good bet? Not likely.
Square made headlines on Monday when it revealed that a key Yahoo executive, Jacqueline Reses, is moving over to Square. Square CEO Jack Dorsey, who’s also Twitter, Inc. (NYSE:TWTR) captain, has been moving fast in making some active changes at both his companies. He has been largely successful in turning around investor sentiment on TWTR stock in just two weeks since taking over the helm of affairs.
His focus is back on his brainchild as the payment-processing company, Square, gears up fast for its initial public offering (IPO) after having filed its S-1 form last week with the SEC. It’s expected that we’ll see Square stock trading on the market by the end of the year under the symbol, “SQ.” However, the Square IPO price and the Square IPO date have not been set yet. (Source: Square S-1 Filing, SEC, last accessed October 19, 2015.)
But the million-dollar question is whether this IPO will be any better than other tech IPOs this year.
Square’s biggest challenge will be having a captain that has his feet stuck in two boats. I’ve been skeptical about Twitter for this very reason. Dorsey has a lot to do to turn around the company until potential stockholders are able to see some net green figures on its income statement. Two of Dorsey’s earlier product candidates turned out to be duds. Square Wallet and Square Order were both flops and had to be discontinued.
Worse yet, competition from Apple Pay, Android Pay, the latest Samsung Pay, and of course payment processing giants like Global Payments Inc. (NYSE:GPN) and Vantiv, Inc. (NYSE:VNTV) are further making things tough for the company in the payments processing space. We’ve witnessed how similar IPOs are showing lackluster performance on the market. First Data Corporation (NYSE:FDC) is a recent example in the payments processing arena that got IPO-ed last week but has already tanked 1.7% in less than three days of trading. The company expected to land an IPO price between $18.00 and $20.00 but instead had to settle with $16.00.
Another challenge is Square’s negative earnings stream. Square has earned over $560 million in revenue in the first six months of 2015, which is a 51% increase from the same period last year. But the good news turns bad as you scroll down to its net earnings figure in red. Although the losses have been slimming over the years, I still foresee troubles ahead.
A major future dent in Square revenue will come after the third quarter of 2016, courtesy of Starbucks with which the company currently has an agreement to process payments. Square’s popularity was in part due to its partnership with Starbucks. But that’s soon going away as the agreement ends next year and Square has no intentions to renew it. Starbucks alone contributed over 11% to the first six months of revenue for this year.
The Bottom Line on the Square IPO
Square may have a chance at becoming a big name in the fast-growing e-commerce industry in the long run as the consumer payments grow to heavily depend on digital processing. Currently, over 55% of the total consumer payments in the U.S. are processed digitally. This serves Square an opportunity to tap into the payments markets, especially for small businesses. But until I see the company making some solid money, I wouldn’t want to bet on Square stock that’s returning me nothing as a stockholder.
It remains to be seen how the company will fare without Starbucks in the picture. I would be staying on the sidelines until I see something promising out of company before jumping onto the IPO bandwagon.
To put it into the great Warren Buffett’s words on IPOs; if it wasn’t overpriced, they wouldn’t be selling it.