An Insider’s Perspective: What Square’s IPO Really Means

There has been plenty of controversy over Square and its valuation, particularly after it priced its IPO at $9 a share — about half the valuation it had at its last capital raise — on Wednesday evening.

In the first few hours of trading on the NYSE as $SQ, however, things appeared to be looking up for Square as it opened at $11.20/share, and most recently in the day, shares climbed 51 percent to above $13.

Square is certainly not at the expectations Jack Dorsey and his investors would have hoped for its public debut, but the day is young and so is Square’s spot in the publicly traded word. To get an insider’s perspective about what its somewhat rocky IPO debut means for this mobile payments FinTech unicorn, MPD CEO Karen Webster spoke with BlueSnap CEO Ralph Dangelmaier about what he thinks about the IPO and what he thinks is next for Square.

“It’s probably one of the more hyped up IPOs in the payments space in the last month or so. But what’s interesting is the valuation is being discussed quite a bit. I think, personally, a $6 billion valuation, which was what it got from private equity money, was really, really high. Much more than a company like Vantiv, two-thirds of a company like Worldpay — it’s really high. So coming out at about $2.8 billion-$2.9 billion compared to its peers really isn’t that bad,” he explains to Webster.

But, Webster points out, if the expectations were a “bit misaligned,” the slash in its valuation could give it the “aura of not being a good company.” After all, being a $6 billion company that then gets valued at $2.8 billion doesn’t sound like a good story.

“I would argue that it may be a good company, and the valuation may be appropriate,” Dangelmaier said.

But why?

“The growth rate is phenomenal. It’s been growing about 100 percent,” he explained. “They are spending a lot of money on marketing and they are acquiring new customers. I think it’s obvious they are filling a void that was left by the current payment processors. They are out attacking and acquiring smaller customers that traditionally had to go through banks to get acquiring services. Now they can apply online, too, and get the acquiring services and have a simple little dongle.”

Then again, Webster says, Square’s revenue doesn’t come from processing; it comes from its lending business. So how, now, can Square get back to its original vision to serving micro merchant with card processing/acceptance capabilities?” Webster asks.

“Only time will tell,” Dangelmaier says. 

“Obviously, their plan is to become more of a financial services partner with a cool technology platform for these small businesses. Will they be selling processing capabilities? Will they be selling lending capabilities? Will they be selling payroll capabilities? I wouldn’t be surprised if they started selling deposit capabilities as well,” he adds.

Perhaps it’s not all doomsday for Square’s IPO? Dangelmaier elaborates, telling two sides of Square’s box. 

“I think these guys have a lot of opportunity. What they’re basically saying is ‘This market is well underserved, and we have probably one of the better social media marketing people at the helm — and Jack Dorsey.’ What people are saying is, on one hand, that they really will bet on Jack, and that’s one reason the stock has gone up (or the value it’s gotten). And the other side of the coin is: Can this guy really be the CEO of both companies?” he explains.

“The markets will decide. Today, it’s already trading up 30 percent on the opening. That’s not a bad start for a company that’s supposedly came out of a lower valuation.”

Looking a year ahead, Webster asked Dangelmaier to look into his crystal ball. Is Square still a publicly traded company? Or have they been acquired?

“I think they are still going to be independent. I think they have a lot to prove out here to investors and to the rest of the payments space that they can keep up this growth. They are obviously burning a lot of cash, which is why they raised this money,” Dangelmaier concludes. “They also lost the Starbucks account, which is well known. So they need to nail a couple big accounts before some of the big folks take them seriously and acquire them. Maybe this is the beginning of another National Cash Register in the making. If it is, we’ll know in the next few years.”