Square Stock Closes Below IPO Price
UPDATED – 1-29-2016 – THE PRICE OF SQUARE STOCK CLOSED BELOW ITS IPO PRICE YESTERDAY AND SETTLED AT 8.74. Meanwhile, Paypal reported strong earnings growth and profitability. See the article about Paypal here
(image source Yahoo Finance)
ORIGINAL ARTICLE – JAN 22 2016:
Square Makes A Splash As Share Price Goes Briefly Underwater
The value of a share of Square stock fell below its IPO price during intra-day trading recently, making us wonder if the company is going to get its act together.
The Point of Sale News has been a fan of Square since its inception. There’s no doubt that the company, under the leadership of Jack Dorsey, has helped drive the expansion and acceptance of tiny merchants and stimulated the use of credit card processing worldwide. However, with years of no profits, and dilution of the company through ample distribution of employee stock, we don’t see a track to success.
The company has, of course, stimulated a world of Square wannabee’s who have come out with their own credit card processing apps. Major credit card processing companies and national banks have built their own simple apps for mobile payment processing and are providing a magnetic swipe reader attachment for those apps. The lure of all those fees must seem like low hanging fruit to many. Yet, for all its progress, Square continues to operate at a loss. According to the Barron’s website this morning, EPS has been negative for the last three years.
Square has been very entrepreneurial since it began, and branched out in a multitude of directions in attempts to extract more revenue from its installed base. Sadly, it continues to spend more than it makes, which leads us to believe that the low rates it offers are insufficient to sustain a company engaged in that core business. Ideally, it would have a self-sustaining revenue model before experimenting with new directions. Is a rate increase in the near future? Or an annual membership fee? The burn rate is just too high to continue as is.
One of the avenues it is pursuing – offering payroll services – has been rolled out to only a few states so far, including mine (Florida), which has no state income tax. With a plethora of payroll companies out there, is it necessary to start a payroll business from (almost) scratch? Why not just create relationships to export the data to established players, and capitalize on those? It seems unlikely this foray into payroll will actually be profitable anytime soon, unless it capitalizes every scrap of development and marketing expenditure – which is a questionable procedure – in our humble opinion.
So, what can you do with Square? Well, plenty of companies might look at Square as a tasty snack, if the red ink continues to flow and the stock price continues to tumble. A company like Heartland, who already operates a profitable payment processing business, and also a payroll business, might find it attractive.
It is too early to forecast any scenario with a degree of certainty, but we just don’t see a cohesive plan at Square. In Apocalypse Now, near the end of the movie, Marlon Brando asks Martin Sheen if his methods were “unsound”. And Sheen’s famous reply? “I don’t see any method at all, sir”.
We’re not suggesting there is no method at Square – but running the core business at a loss perpetually, in the hope of producing gains from add-on services, while diluting the stock heavily, is not a sound method.
(top image source Google Finance – https://www.google.com/finance/historical?q=NYSE%3ASQ&ei=I3ihVrnSFteqefaXg7gG&start=30&num=30)
(second image – Barrons – 1-22-16 – http://www.barrons.com/quote/stock/us/xnys/sq )
(third image – click on the YouTube image to see Brando and Sheen in this famous scene)