Mobile Commerce

IPO Watch: Square…A Bloated Unicorn?

The news the payments community has been waiting for has hit the wires: Square has filed for its IPO.

The mobile payments startup officially announced the plans yesterday (Oct. 14) on its blog, which revealed that Square will trade on the NYSE as SQ. The proposed IPO price range for its public debut has not been determined, according to the post.

The SEC filing shows that Square filed to offer up to $275 million in stock, which may only be a placeholder until the amount is fully calculated. Because the details of the S-1 are preliminary, they are subject to change.

Square’s IPO plans come at an interesting time for the company, as founder and CEO Jack Dorsey just officially took over as permanent CEO once again at Twitter. With a 24.4 percent ownership in Square, Dorsey still has a large vested interest in its financials, while venture capital firm Khosla Ventures holds the second largest stake at 17.3 percent.

The filing also provides some color from Square’s executive board, revealing the obvious risk of having its CEO serve as the CEO of another publicly traded company.

“Our future success is significantly dependent upon the continued service of our executives and other key employees. If we lose the services of any member of management or any key personnel, we may not be able to locate a suitable or qualified replacement, and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth. Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter. This may at times adversely affect his ability to devote time, attention, and effort to Square,” the filing reads.

“To maintain and grow our business, we will need to identify, hire, develop, motivate, and retain highly skilled employees. Identifying, recruiting, training, integrating, and retaining qualified individuals requires significant time, expense, and attention. In addition, from time to time, there may be changes in our management team that may be disruptive to our business. If our management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed,” the filing continued.

Square will go public with the help of Goldman Sachs, Morgan Stanley and JPMorgan as their joint book-running managers. Barclays, Deutsche Bank Securities, Jefferies, RBC Capital Markets and Stifel will also act as book-runners. LOYAL3 Securities will act as co-manager for the IPO.

Square’s plans to join the world of publicly traded companies also comes at a time when the IPO offerings for small tech firms haven’t been favorable, according to much industry chatter. Instead, many tech companies have leaned toward private funding rounds as an alternative to give them a boost in a crowded market.

The S-1 works through a range of details, as S-1 filings usually do, with respect to the payment company’s financials, risk factors (generally general language but here a red flag as noted by the $5.7 million loss tied to fraud at a single customer).

At first glance he numbers show some promise.  While the revenues may be a bit, well, light compared to what some industry watchers might expect on absolute basis – at only $850 million in its latest full year, sales grew by more than 53 percent over 2013. No doubt observers will take the six month tally thus far in 2015, at $561 million, extrapolate it through the back-end, and say the revenue run rate is more than $1 billion. 

But at a valuation last seen at $6 billion (admittedly before the end of 2014’s full term) and which is a 6x sales multiple on 2015 (projected), and more than 7x on 2014 (actual), the question must be asked if this is a bloated unicorn.

A number of investors paid a little less than $15.50 a share through the Series E, and mandates hold that the IPO price at $18.56 a share, or higher – or else they receive additional common shares, which would presumably dilute other holders, all things being equal – and no one wants to get diluted.  So there’s a floor under the stock. 

Until the shares come to market and the real test begins.  One would like to be assured that the tide of red ink is receding but net losses have grown as fast as the sales – which implies that the real expenses of the business track the real growth.

So much, then, for realizing a net profit any real time soon, at least for a while until after the shares come to market, sell-side analysts trot out their models and discounted cash flows, and triangulate this way and that to get a target price.  A sales multiple it is for now, then. 

There may be investors willing to pay up handsomely, at 10x sales, or other proxies.  The payments world saw it with the Braintree takeout by PayPal for an all cash deal a few years ago for about $800 million, comped against an annual transaction value of $12 billion, and (since details weren’t public) some reports of $80-$90 million in fee revenue. But that was then, and the investing environment is a bit more skittish – especially when the baton crosses from Sand Hill to then retail investor.

To check out what else is HOT in the world of payments, click here.



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The CFO’s Guide To Digitizing B2B Payments, a PYMNTS and Comdata collaboration, examines how companies are updating their AP approaches to protect their cash flows, support their vendors and enable their financial departments to operate remotely.