Measuring Square

Square (NYSE: SQ) is coming public as a $1B revenue company with quite a few moving parts. There’s the negative margin Starbucks business which is going away, plus the “ratchet” provision whereby prior investors will have their number of shares adjusted based on the IPO price to preserve their prospective returns.

We suspect it will take at least a quarter or two for analysts and investors to get a better understanding of how the long-term model will develop for Square. It helps to have a starting point so we’re publishing our initial IV model which suggests a current price of just over $17/share. Interest in the PayPay (Nasdaq: PYPL) spin-off has been high and we expect Square will generate similar levels of activity. Suffice it to say that the jury remains out on which players will be long-term winners in the payments game.

In addition to Square itself, their strategy has implications for direct lending (Lending Club LC and OnDeck ONDK among others), marketing (Constant Contact CTCT, HubSpot HUBS, GroupOn GRPN) and possibly larger firms like Intuit INTU.

The press has been guarded if not outright negative on Square for the last few years as speculation about their momentum and ultimate fate swirled around. Now that we have a concrete IPO we can sort through the facts as they stand. Here are the main points as we see them:

Going beyond “just payments” and into data analysis, marketing and financial services seems like a good strategy for the SMB market that Square targets. Generally speaking small companies lack the resources and interest in decoding Google Places, AdWords and services like Constant Contact or Mailchimp. They are forced to invest in compliant POS services to run their business so additional benefits like financial services and marketing make sense.

The cash advance business is another nice addition to services. PayPal has been pushing this too so it’s not unique. Compared to the rates that OnDeck charges for short-term money this might not be good news for them. This business should grow nicely and ultimately cuts into the territory that American Express occupies with small business owners.