What Square’s IPO Says About Its Future Growth Prospects

What Square’s IPO Says About Its Future Growth Prospects

Here’s a closer look at Square, which makes mobile credit card readers, especially for small businesses, and its prospects for the future.

Understanding the Company’s Current Services Is Important

To understand why Square’s IPO unfolded the way it did, it’s important to know what the company does. Square is best known for its mobile credit card readers, literally square plastic devices that plug into smartphones and work with a related application to allow merchants—most of whom operate small businesses—to take credit card payments. The company also has the Square Register point-of-sale service that supports gift cards, creates invoices and even provides loans for businesses. The company has grown from a rather simple operation into one that has many components, all designed to make it easier for small businesses to operate.

There Are Concerns About Founder Jack Dorsey’s Commitment

At Square’s helm is Jack Dorsey. During the period leading up to the IPO, Dorsey discussed Square’s services, how he believed he could make the company profitable and other business factors that investors typically care about. However, there is a concern about Dorsey because he also serves as the CEO of Twitter, another company he co-founded. Many investors wonder if he can make Square profitable while trying to fix issues at Twitter.

Competition Is on the Rise

While investors were analyzing Square, they didn’t lose sight of the company’s competition. Apple, Google, Samsung and other companies are all entering the mobile payment space that Square once had nearly all to itself. Analysts and investors argue that such competitors, with all of their cash, may be able to easily push Square out of the market and turn it into an afterthought. While Square has mitigated some of those risks by diversifying its business, a steady stream of analysts continue to say that if these big-name competitors are able to rapidly build up their mobile payment businesses, Square could be in serious trouble.

Square Keeps Losing Money Even as Revenue Grows Rapidly

Dorsey has tried to keep investors and analysts focused on his company’s revenue growth—which for the first nine months of the year reached $892.8 million, a 49 percent gain year-over-year. But this did little to satisfy them because Square lost $131.5 million during the first nine months of the year. This was up from a $117 million loss in the prior year. Sensitive investors are not too interested in companies that don’t have near-term prospects for profits. This took the air out of Square’s IPO.

The IPO Was Priced Lower Than Expected

In a surprising twist, Square decided to price its IPO below its last-reported range of $11 to $13 a share. The company announced prior to its IPO that it would instead price its shares at $9. While Square was still able to raise $243 million at that price, it was far below what venture capitalists had hoped for. Since the price was so low, Square was forced to provide venture capitalists with more shares to sell to make up the difference in valuations.

There Have Been Many Underpriced of IPOs This Year

Although it was bad news for Square to price below its range, it’s not alone. In fact, out of the 144 companies that have gone public in the U.S. so far this year, a surprisingly high number (35) priced their IPO under their earlier announced range. The phenomenon is due in part to investor concerns over the global economy and how an anticipated interest rate hike may impact the market. Several institutional investors say that the market is ready for a drop, which is causing tepid responses to companies that don’t have stellar financials when they go public.

What’s Happening With These So-Called ‘Unicorns’?

After Square started to face troubles during the IPO process and ultimately decided to price its shares below its range, talk of tech “unicorns” started to crop up. While the term refers to companies that have exceeded a $1 billion valuation, some have used it to argue that venture capitalists are becoming overzealous in valuing the companies they back. The market, those folks say, is starting to prove that heavily funded startup companies may not be as valuable to Wall Street investors as they are to venture capitalists betting on big returns. There is a possibility that Silicon Valley VCs in the coming months will re-evaluate of some of the startups in their investment portfolios to better reflect their true worth in the current market. Square is just one of many “unicorns,” but it’s a significant one. During its Series E round of venture funding, shares were sold at $15.46—well above the $9 price it set for its IPO.

Did Other Recent Tech IPOs Worries Undercut Square Valuation?

Some analysis suggested that in addition to Square’s own market position, investors have grown increasingly wary of other tech IPOs. This wariness dates as far back as Facebook’s 2012 IPO, where shares dropped significantly after its opening, resulting in lawsuits by investors. Investors are also concerned about the growth prospects for another social media star, Twitter, which is struggling to expand revenue to keep investors happy. These concerns may have made investors extra cautious about bidding up Square’s IPO share.

Square’s IPO Beat the Company’s Conservative Starting Price

Despite all of those issues, Square’s Nov. 19 IPO got off on a positive note. The company’s shares quickly shot up in early trading, reaching a high of $14.78 during the first day of trading, closing at $13.07, which was significantly above its projected initial range. Cutting back the initial price to $9 now looks like a smart move that avoided disappointing investors even more.

What’s Next for Square?

Looking ahead, there are several questions left for Square to answer. The company says it will work toward profitability while maintaining its commitment to low fees. In addition, Square believes there are opportunities in the ancillary services, such as invoicing. Square also seems excited about an upcoming near-field communication technology. The device will allow merchants to receive secure mobile payments via Apple Pay and similar services. Square argues that its near-field communication point-of-sale service could be the secret to sidestepping some of the big-name competitors.