Square, Inc. just filed its S-1, the preliminary SEC filing necessary to pursue an initial public offering in the near future. And while many investors have anticipated a Square IPO, it’s a big development to see the actual paperwork necessary for such a move.
While many are caught up in the drama around Twitter Inc (TWTR) and how Square CEO Jack Dorsey will be splitting time as the head honcho at Twitter, the bottom line here is not the person in charge of Square, Inc. Rather, the bottom line for investors remains (as always) the bottom line.
The good news is that while the Square IPO filing shows (unsurprisingly) a company operating in the red, the growth rate is pretty impressive.
But the bad news is that profits need to pick up and margins need to improve for this mobile payments company to truly be a viable investment.
Square IPO Filing Details
If you want to read the Square S-1 for yourself, here’s the link. But frankly, the most important details can be gleaned from the following bullets and one screenshot. Namely:
Click to Enlarge Big Top-Line Growth: Revenue has been soaring, from $434 million in FY2013 to $708 million in FY2014 (a 63% growth rate) to nearly $1 billion by the end of the current fiscal year (a 41% growth rate).
Lots of Merchant Connections: According to Square, “In 2014, sellers using Square processed $23.8 billion of GPV (gross payment volume), which was generated by 446 million card payments from approximately 144 million payment cards.” Also of note is that “In the 12 months ended June 2015, over two million sellers accepted five or more payments using Square.” In other words, there is pretty good reach here.
Expenses Are (Theoretically) Not a Problem: Cost of revenue is growing slower than actual revenue thanks to the scale of Square. For instance, while total revenue for the first half of 2015 is up 51% over the first six months of 2014, cost of revenue is up only 44%. That’s not a great differential, but better than some tech startups that have to spend ever-increasing amounts of money to grow.
Starbucks Is a Great Case Study: Interestingly, the Square, Inc. S-1 filing breaks out transaction revenue from Starbucks (SBUX), a key partner, as a way for investors to investigate the business with a bit more information. SBUX revenue accounted for 13% of total sales for the first six months of this year, which is an interesting figure no matter what your perspective … particularly when you couple that with the fact that transaction costs were actually bigger than those revenues. So is that big share of sales a risk — particularly because that relationship with Starbucks is actually ending and the revenue will go away? Or is it a plus because the transactions were money-losers anyway? Should Square find a similar deal with the likes of a retailer like Target (TGT) or another eatery like Chipotle (CMG) that’s willing to partner with it, is that a good thing or just another money-losing proposition based on SBUX figures? It’s a question that investors should consider seriously … because big merchant relationships like this may define the success or failure of Square, Inc. in the coming years.
Anyone interested in the future of mobile payments via stocks like PayPal (PYPL) or startups like Square should take a good look at the numbers here. The bottom line is that Square is a money loser and has been for some time … but it’s all about potential for IPO investments like this, so what your hypothetical growth scenario is matters much more than these actual figures.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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