Once upon a time, back when I had hair, Gary Kildall was a name to be reckoned with. His Digital Research Inc. owned the most popular operating system for PCs, CP/M. But he made mistakes, most notably refusing a favorable licensing deal with International Business Machines Corp. (NYSE:IBM), which wanted to get into the business. They went to Microsoft Corporation (NASDAQ:MSFT), and the rest is history. By the time he passed away, in 1994, Kildall was already forgotten.
I’m beginning to think that Jack Dorsey, CEO of Square Inc (NYSE:SQ) as well as Twitter Inc (NYSE:TWTR), may be this decade’s Gary Kildall.
His mismanagement of Twitter has already been discussed here. But let’s talk about Square and the listlessness in SQ stock.
Square Is Losing With Easy Money
Square is a great idea, but for small investors, the company has been a nightmare.
By offering one-size-fits-all pricing and the ability to take transactions on a smartphone, Square truly revolutionized commerce, reaching kiosks and micro-businesses companies like Visa Inc (NYSE:V) could not touch.
Processing is a great way to make money. You take a cut of every merchant’s action — 2.75% in this case, plus processing fees. You don’t hand over the money until transactions clear. Square is practically a license to make money. It’s better than a casino.
Dorsey brought Square public in November 2015 at about $15 per share. If you invested with him, you’re down 15%. Since then, Visa and MasterCard Inc (NYSE:MA) are up. Shares in their big processors are up. The banks are up.
Yet Square is down.
The reason is a lack of profits. Square has yet to make money as a public company, and cash flow has deteriorated. The Amazon.com, Inc. (NASDAQ:AMZN) investment case is all about rising free cash flow.
Square has introduced some unique services. Square Cash lets businesses move money quickly and easily. Square Capital is an innovative source of small business financing. Square Payroll should be a player against companies like Gusto, formerly ZenPayroll, that are still backed by venture capital. All they need is competent, operational management to grow.
But Dorsey has also led some acquisitions that are pure head-scratchers, like Caviar, a food-delivery service. He doesn’t focus on what he has, instead thinking grand strategic thoughts he doesn’t have the staff to execute on.
Square’s market cap in October 2014, when it got its last infusion of venture capital, was estimated at $6 billion. Its current value, as a public company, is $3.8 billion. The public got what the VCs call a “down round.”
Can SQ Stock Be Fixed?
Many people have weighed-in on whether Twitter can be fixed. (I think it can.) Few have asked whether Square can be.
For me, obviously, the first step would be showing Jack Dorsey the door. He never should have been allowed to run two public companies simultaneously. I don’t know what he’s doing running even one.
This is not personal. I happen to consider Jack Dorsey a great entrepreneur — someone with big, unique ideas that can make billions of dollars. He’s just not a CEO.
The skills of starting things and running things are different. Thomas Edison wasn’t a great CEO, either – General Electric Company (NYSE:GE) was created to ease him out of management in 1892.
Square has contributed a lot to the open source community, but it needs more outside developers thinking about business in different ways, and contributing those thoughts back in the form of code. Square has opened its payments code to developers, but it needs to do more to bring business innovators to the party, simplifying the code base. Put the next hackathon on Wall Street or, better yet, 57th.
Finally, Square managers need to focus on those business innovations that move the needle on revenue and profits, like Square Capital, Square Cash and Square Payroll, rather than the nuts-and-bolts of the code. You let innovation come to you, and innovate where business skills are required.
Who can do that? A banker can do that. A financial manager can do that. A coder and entrepreneur aren’t going to do that.
Square is no longer a tech company, in other words, nor is it a start-up. It’s a finance company.
Run it like one.
Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN, GE and MSFT.
