Friday, November 20, 2015
Don't Be Square
I hate to be boring but here we go again. Square has jumped to nearly $14 after its IPO. To justify that valuation you have to assume significant future value creation (what financial economists call growth options). Exploiting growth options requires barriers to entry and in the payments world the barriers may be less than in the wearable devices market discussed here earlier. Apple and Samsung, among others, may use payments as a free feature to sell their devices. Of course, Square may say that it is going to become some type of financial service provider for small business. But at this point that is pie in the sky and that business is highly competitive too. In short, buying Square for about $14 means bearing a great deal of risk for what appears to me to be little expected return at such a high valuation. The good news is incorporated in the price but that market has not given enough weight to the down side. Bottom line - keep you money elsewhere and don't be square.