Mobile Payments Company Square Finally Files for IPO

Square Inc., the other company led by Jack Dorsey besides Twitter TWTR , finally filed for an IPO yesterday. The six-year-old California-based company expects to raise about $275 million.

However, there has been much debate regarding the company's decision to go public, given concerns about Jack Dorsey's dual commitments, a tough market for technology IPOs and of course the company's not-so-encouraging financial position.

In addition, Square has started a new initiative, which would allow associated merchants to invest directly in the company. For this, the company has formed a new body called Start Small Foundation, which would conduct the sale of shares under the directed share program to Square's customers. In fact, Dorsey has pledged a part of his own stake for this saying that "I'd rather have a smaller part of something big than a bigger part of something small."

What Exactly Does Square Do?

This mobile payment processing company is the brain child of Jack Dorsey and Jim McKelvey. Since it started operations in 2009, the company has evolved to expand its offerings beyond the payments industry. Square has expanded its presence into markets like cash advances and peer-to-peer mobile money transfer. Earlier this year, the company even developed software for catering to marketing and payroll requirements.

However, the company derives most of its revenues (about 95%) from payments and point-of-sale (POS) offerings. According to the co-founders, Square was initiated with an aim to ease the payment processing system for all types of businesses including small and medium. The company has created a niche for itself in offering novel hardware like white cube square readers that can be plugged into the headphone jack of mobile devices thus making them function like electronic sales terminals. Such offerings have aided the transformation of small and mid-sized merchants, making them more consumer-friendly as they can now accept credit cards.

At present, Dorsey is the largest shareholder of the company with a stake of 24.4%, followed by Khosla Ventures with a 17.3% share and McKelvey with a 9.4% stake.

The company's offerings support services like Apple Pay, Android Pay and even EMV chip cards. Additionally, it also intends to partner with data-collecting companies like Intuit and Bigcommerce for enhancing its analytics services.

How the Mobile Payments Market Is Faring

The mobile payments industry has gained a lot of traction in the past year or so with the entry of players like Apple AAPL . Earlier, the market was primarily dominated by the likes of eBay Inc.'s EBAY PayPal, Google Inc.'s GOOGL Google Wallet and Amazon's AMZN Amazon Payments among others. However, the recent boom in the smartphone market has propelled the growth of this segment.

With increasing adoption of smartphones, more and more aspects are getting linked to mobile systems. This is likely to result in exponential growth in the mobile payments market in the coming years.

According to an IDC report, the mobile payments market across the globe is expected to reach $1 trillion by 2017, growing at about 124% from about $500 billion projected in 2015.

With such impressive growth projections, Square (given its novel offerings) does stand to gain from the increasing demand. But competition is also rife with increasing number of players. The company is still at a nascent stage and therefore not strong enough to cushion itself from the market headwinds.

What's Worrying Investors?

Despite its strong prospects, investors remain wary as the company is still not profitable. This raises some questions regarding the timing of the IPO.

Per the SEC filing, Square has delivered mixed results so far with revenues improving modestly but losses were also quite high. In the first six months of 2015, while revenues improved 51% year over year, the company's net loss was $77.6 million. Square has stated that a part of this loss ($5.7 million) was owing to a fraud by one of its customers. While gross margin and EBITDA levels have been modest in the last quarter, the question remains as to whether the company will be able to drive growth amid the risks that come with operating in the financial services sector.

Even in the case of Twitter (co-founded by Dorsey), it was widely felt that the company went for an IPO before it was ready. Eventually, it had to cut down on innovation to reduce its cost levels, which created further problems

Also, the company is headed by Dorsey who has still not provided any specific comments as to how he would be allocating his time between Square and Twitter. This in fact has been the bone of contention for some time now as a lot of analysts believe that it would be quite a difficult task, more so as both these need solid leadership.

Another concern is that Square expects its deal with Starbucks to likely end in the near term. This can be a cause of worry as about 14% of Square's total revenue in 2014 or $123 million was derived from this collaboration.

Additionally, in recent times, the tech sector has had some less than successful IPOs. For instance, the enterprise storage company, Pure Storage, which launched its IPO earlier this year was not well received by investors. In fact, some other companies like Uber and Airbnb are keeping away from going public, raising funds privately instead.

However, Square, being in the mobile payments business, is likely to fare better. Going public will definitely create more awareness about the company and will also likely add to its credibility in the market, which is one of the most important drivers in the financial services industry.

To Conclude

While there are a lot of challenges that Square might have to face, the scope for growth in the market does makes up for the risks involved to some extent.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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