Yesterday Square (finally) went public on the NYSE, with shares initially trading at $9 and ending the day at around $13.07, a nice rise of around 45%. Looks good on the surface – shareholders like charts that go up.
The $9 trading price could be seen as sandbagging by the company, given that the original trading price was to be around $11 to $13 and the IPO valuation is 52% lower than the $6 billion valuation in the funding round of just over a year ago. The modest increase seen in the last day is at least an increase that looks positive to would be investors and certainly to Square themselves. Today is another day and who knows, maybe it will sustain it’s 45% daily rise. Maybe.
So what’s happened in the last year and why this tepid response to what should be one of the hottest IPOs since Facebook? The plain and simple reason is that, as SOME GUY was quoted as saying in Forbes a few months back, Square “looks a bit long in the tooth.”
Square launched its first reader in 2010, the same year as the iPad debuted. Arguably, not a long time ago, but the consumer electronics world ages in dog years. Square’s NKOTB status five years ago was refreshing and audacious – offering a simple and eloquent solution to enable small merchants to accept card payments without having to put down hundreds of dollars for one of the design abominations from traditional POS vendors. There was a collective industry *facepalm* moment as we got that the audio port was the one universal interface for smartphones across all permutations – Apple, Android and Blackberry – a stroke of genius. This was a smart company that offered simple and elegant hardware along with a pricing structure for transaction fees that were transparent. And the cost of entry to accepting card payments – zero. The readers were given away.
Problems began to set in when other, more established payments players decided to get into the game. Discovering that the card readers could be easily replicated companies including PayPal, Verifone, Intuit and Amazon replicated Square’s initiative of giving away readers and it became a race to the bottom for transaction fees.
Further trouble arose when the collective card networks announced that the US would actually move to EMV in 2012. While the timeline was hardly aggressive (we are still VERY far from being EMV ready), this must have been quite a WTF moment at Square HQ. Mag stripe readers are simple and cheap to make. EMV card readers are not and the bill of materials would necessitate actually charging customers for the hardware.
And now there is the spectre of NFC mobile payments contrasting Square’s archaic card acceptance business. As I mentioned in my last post, I don’t think the payments landscape will switch as fast as some anticipate, but certainly Apple Pay has taken some of the sheen off Square’s innovation crown. Paying with plastic – that’s medieval.
Square has continued to push into other areas – there was a $25 million investment from Starbucks in 2012 which provided Starbucks with preferential processing rates and Square the opportunity to promote Square Wallet – a forward thinking service that allowed both ordering ahead and for the barista to see a photo and name of the customer who they were serving – a stroke of CRM genius. For Square, this could have been the spearhead they needed to gain traction with other larger merchants and to push their hardware products such as Square Register. However, this failed to displace Starbucks immensely successful mobile app. Two years in, the relationship went sour and today, Starbucks has all but abandoned the venture.
There have been other Square initiatives designed to spread the load from the cash cow of card acceptance, but these can be largely categorized as following rather than leading. Square Cash offers P2P money transfer (like Venmo, PayPal), Square Capital (like Kabbage, On Deck, PayPal) and Caviar (like Foodler, Eat24). But fundamentally, Square’s success will probably continue to rely on their ability to adapt and survive in the new EMV environment. Square has an EMV reader available which retails at $29. Not free, but not extortionate for sure. They have also developed a contactless EMV reader which retails at $49. Again, not free but not outrageous. The price point may be something of a deterrent for some small merchants, but actually Square is probably overdue for thinning the herd of yard sale vendors to those that actually put through enough transaction volume to be worthwhile. But, this will place Square in a more competitive environment where more dedicated sellers may opt for a more industrial grade product from a Verifone or Ingenico if card transactions are that critical to their business. And what if the US pivots to Chip and PIN?..
Square’s certainly in a tough environment and I would like them to surprise me again with something that takes me offguard. Dorsey thinks there’s still legs in Square Wallet, and actually, so do I. It’s a move closer to the utopian “Uberized” payments that folks such as myself talk about probably too often. They’ll however need to sell a bazillion card readers to get investors to trust them in such initiatives, particularly post Starbucks.
(A day’s worth of trading data doesn’t make for a solid growth forecast. Currently Square’s trading at $13.60. Upwards is good, right?)