Is Square Ready to Go Public?

Square has reportedly delayed an initial public offering, which gives the company a chance to build more services that position it for sustainable growth in the future, according to payments consultant Richard Crone.

Square has postponed its IPO indefinitely, according to Fox Business, which quoted unnamed sources attributing the delay to problems with the company's projected future financial performance.

"The micro merchant market is nearly saturated," Crone says, adding Square would benefit from building the user base for its mobile wallet, which would expand the company's strength as a merchant acquirer. Square has also recently made moves to attract larger merchants through products such as Square Stand. "To have a lucrative IPO you have to have all of your revenue sources lined up in advance," Crone says.

Square has raised capital at a $5 billion valuation, and would have trouble achieving that market cap in the public market, Fox Business' sources said.

"I wonder if there isn't some concern that the financials of a payment company like Square, where the revenue comes from taking a small fraction of a small fraction, might look underwhelming to the market," says James Wester, a research director at IDC Financial Insights. "Square has touted its processing rate, usually on an annualized basis, but only a small amount is actually revenue. That might make it difficult for Square to live up to its pre-IPO hype."

Square, which was created by Twitter founder Jack Dorsey, has raised more than $340 million from sources such as Sequoia Capital, Kleiner Perkins, Visa and Starbucks.  

The mobile point of sale company first began prepping to go public in the fall of 2013, not long after Twitter—another company founded by Jack Dorsey, had its IPO. Square is expected to process $30 billion in credit card transactions and generate sales of $1 billion in 2014, according to The Wall Street Journal.

"Square invented the mobile point of sale market for micro merchants, but that was in advance of all of the existing players in the point of sale market," Crone says, adding the glut of companies doesn't leave a lot of room for expansion based on micro merchant processing.

Acquirers and ISOs have also found the merchants in Square's market hard to make profitable, Wester says. "That's why they were an underserved market. That's also why Intuit and others are bundling the processing with other services that are more profitable," Wester says.

Square's delayed IPO will make it a likely target for acquisition by larger payments company, Fox Business reported, though Crone says that may curb Square's ability to innovate quickly.

"The larger companies always suffer from the innovators' dilemma," Crone says, adding Square would be held back by the legacy point of sale technology of its' acquirer.

Square has not released any information on an IPO, and would not comment further, Aaron Zamost, a Square spokesman, said in an email to PaymentsSource.