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Tuesday, November 24, 2015

Square after the IPO

On Nov. 19, 2015, Square Inc. debuted on the New York Stock Exchange under the ticker symbol "SQ," trading at $11.20 per share before closing the day at $13.07 and raising about $243 million. Square initially set its IPO price at $11 to $13, but institutional investors bargained for $9 per share as the valuation of the company slipped from $6 billion in recent months to $2.9 billion before the opening bell.

Square joined the ranks of recent "unicorn" IPOs, defined as technology-based companies valued at $1 billion or more by public or private market investors. Square, like others in this category, has yet to turn a profit. During the first nine months of 2015, Square posted $131.5 million in losses, up from $117 million over the same period in 2014.

A number of analysts expressed disappointment but not surprise over Square's lackluster performance on Wall Street. "Over the past few days we have seen a spike, but that's typical in a lot of these IPOs where they'll spike over the first couple days or even over the first few weeks, and then we really start seeing it destabilize or decline on that front," said Jared Drieling, Business Intelligence Manager for The Strawhecker Group.

The days of over-valuating companies in advance of IPO may be numbered. "I think the overall theme here is the valuations are starting to become more based off reality," Drieling said. "The issue with Square now becoming a public traded stock is that Square has traditionally been a technology-related company that was born out of Dorsey and Twitter, and it viewed the world from a social, transparent perspective."

But the lack of focus on profitability by Square to date diametrically opposes how shareholders view the world. "Obviously, capitalists and investors don't necessarily want to be socially useful, they want to make money," he said. "There is pressure not only from a competitive standpoint, but from Square's product just being another option in this field."

One among many

The mobile payment dongle device that set Square apart initially and was offered freely to micro- and small-merchants based on an open rate structure has not been a profitable model. Square has also faced stiff competition from entrenched players, and ROAM Data preceded Square in launching a secure payment device for everyday merchants.

Over time Square has layered in additional POS products and services, including capital funding. But for Square to become profitable, Drieling believes the company will need to further diversify and move upstream to midsize and large merchants where it has struggled, citing as an example the dissolution of Starbucks' relationship with Square.

Another problem for Square has been the U.S. migration to Europay, MasterCard and Visa chip-card payments, which Square has been slow to implement. "Their magstripe readers they were giving away for free were cheap to make, but EMV card readers are not simple or cheap to manufacture," Drieling said.

On November 23, Square launched a new contactless and chip card reader to a group of 100 local businesses nationwide. According to Square, the new reader connects with Square Stand or a mobile device, and pairs with Square's free POS app. This time the device is not free. The new Square Reader is priced at $49 apiece. And now investors will closely watch as each new offering from Square wends its way into the marketplace. end of article

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