> The new rule excludes from these calculations people who obtained equity under the company's equity compensation plans and investors who purchased securities pursuant to the crowdfunding exemption discussed in this alert.
“We lose money on every sale, but make it up on volume”
What are your calculations? Square, Stripe et al are making massive margins on debit card transactions right now. Thanks to recent regulations (the Durbin amendment), the average debit interchange fee is 0.89% all included.[1] Square charges 2.75%. That means they're netting around 1.5-2% on debit transactions. That's huge for a payment processor.
Sure, they have higher costs for credit cards, and their easier sign-up probably means more losses from seller-side fraud. But if they can control fraud then 2.75% is still a healthy gross margin even on credit transactions. And it's crazy big margin for debit.
[1] http://www.federalreserve.gov/paymentsystems/regii-average-i...
http://www.nilsonreport.com/upload/Nilson_Purch_Vol_2013.May...
Here is a more optimistic analysis from Re/Code: http://recode.net/2015/10/14/squares-ipo-filing-its-complica... that looks at the numbers minus the Starbucks deal and concludes that their core business is healthy and has a path to profitability.
"While Square will be a much smaller business from a revenue standpoint after the Starbucks deal lapses, it will be a faster-growing one with a much better shot at profitability."
So what is their target valuation when they go public? If they were going for $1 - $2B valuation? I think the world might buy that, but since their last round was at $6B, their investors would probably be pushing for $10B (because if you recall the Box IPO you remember that none of the late stage investors want to take a down round into the public markets) and that is like "Square 10 years from now" valuations.
So lets watch this one closely and see if they can get commitments for all their shares on the road show. And if not, we'll probably see a giant recapitalization or maybe a firesale to PayPal or something.
OTOH Square is on pace to hit $1B revenue / year and growing quickly vs. anybody else in the processing space, but it will all come down to how the market thinks about their business and their ability to cross the chasm from very small merchants (which makes up the majority of their business and they have locked up because other processors / ISOs cannot compete with their customer acquisition costs) into the next tier of small businesses...
Along those lines, great article from Bill Gurley about revenue multiples: http://abovethecrowd.com/2011/05/24/all-revenue-is-not-creat...
Could you explain? I'm sure you have much more experience reading such numbers[1] than I do, but at a glance they look viable if they can grow to something around double their size.
Ignoring Starbucks and doubling the amounts for 1H 2015 to make it annual, they'll have about $1000M of revenue from transactions, and will pay about $600M of transaction costs. They'll have about $500M of operating costs for 2015 and $100M of various other costs.
If in 201X they were to be double this size, they'd have $2000M of revenue, and $1200M of transaction costs. If they can keep their operating and other costs below $800M, they'll be profitable. Of their expenses, "Transaction and advance losses" will probably scale linearly, but all the rest plausible to be significantly sublinear.
Is this simplistic scenario clearly impossible for some reason?
[1] https://www.sec.gov/Archives/edgar/data/1512673/000119312515...
Given the wailing and gnashing of teeth this time last year [1] when Square raised $150M on a $6B valuation, it is entirely possible this is their last change to raise capital. If it doesn't work, and they can't cross the line into operationally cash flow positive they will become one of the larger unicorns to die this season. I really hope it isn't the case because I love their product and their service, but the S-1 doesn't paint a picture of hope. Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure.
[1] http://www.theverge.com/2014/10/6/6918211/square-funding-sin...