Investors in young tech companies have long valued high revenue growth over profitability. But during an uncertain time for highly-valued private companies, Square’s IPO will test whether that maxim still holds true.
Square IPO to Test if Tech Investors Still Value Fast Growth Over Profits
When the payments company goes public on Thursday, it will bring with it a fast-growing top line accompanied by a bottom line steeped in red.
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Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.
The payments and small-business financial services company is expected to price its IPO on Wednesday evening and start trading Thursday morning on the New York Stock Exchange. When it does, it will bring with it a fast-growing top line accompanied by a bottom line steeped in red.
On the top line, the company’s adjusted revenue — which strips out transaction costs as well as the impact of its soon-to-end Starbucks payment-processing deal — grew 63 percent year over year in the first nine months of this year. That marks a slowdown of four percentage points over the first six months of the year, which saw 67 percent year-over-year growth. The deceleration isn’t ideal, but these numbers would still qualify as fast growth to most investors.
On the bottom line, things aren’t pretty. In the first nine months of the year, Square lost $131.5 million on $892.8 million in revenue, by GAAP standards. Even if you use adjusted Ebitda, a company-friendly earnings metric, Square still lost $35 million during that time period.
One phrase from Square’s IPO filing helps summarize its philosophy: “We frequently make decisions that may reduce our short-term operating results if we believe those decisions will improve the experiences of our sellers, their customers, and other users of our products and services, which we believe will improve our operating results over the long term.”
Among the company’s bets on increasing its profit margins is a new business unit that includes its merchant cash advance business as well as software products to help small businesses with payroll and marketing tasks. This business line, which is more profitable than Square’s core payment processing business, accounted for 12.5 percent of the company’s adjusted revenue in the third quarter of this year.
This article originally appeared on Recode.net.
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