Online payments service Square (SQ +1.54%) and online dating company Match Group (MTCH +0.00%) both went public on Nov. 19. Square, which priced its IPO below expectations at $9 per share, closed at $12 on the day before Thanksgiving. Match priced its IPO at the low end of expectations at $12, and its price rose to $14.60 before the holiday. Square raised $243 million in its public debut, while Match raised $400 million. Those first-week gains were adequate, but hardly explosive. Let's check in with both companies and see if either stock is a worthy long-term investment.
What does Square do?
Square, which accepts electronic payments in the U.S., Canada, and Japan, processed $23.8 billion in payments in fiscal 2014. It's much smaller than rival PayPal (PYPL +1.01%), which has a presence in over 190 countries and processed $69.7 billion in payments during the third quarter alone.
Square Register. Source: Square.
Both Square and PayPal generate revenue by retaining a tiny cut of each payment. Square charges 2.75% per card swipe or paid invoice, or 3.5% plus $0.15 per manually entered transaction. But after backend costs are deducted, Square only keeps about 1% of each sale. PayPal charges 2.9% plus $0.30 for retail and peer-to-peer payments. Both companies offer a wide variety of ways to process payments, including card-reading dongles and peer-to-peer payment apps.
In the first six months of 2015, Square's revenue rose 51% annually to $560.5 million. However, its net loss only narrowed slightly from $79 million to $77.6 million. A major weight on Square's bottom line is its payments partnership with Starbucks (SBUX +4.37%). To secure that profile-lifting partnership, Square gave Starbucks an undisclosed discount on its payment fees. In its S-1 filing, Square admitted that it had lost $56 million in that lopsided deal over the past three years. Payments from Starbucks accounted for 11% of Square's total revenue in the first six months of 2015, but those sales basically contributed nothing to its bottom line.
That's why Square won't renew its deal with Starbucks when it expires next year. Looking ahead, Square plans to sell more paid services like analytics, payroll, and cash advances to merchants, but those are all fairly saturated markets. There's also the nagging question about whether or not CEO Jack Dorsey can lead both Square and Twitter at the same time.
What does Match do?
When IAC (IACI +0.00%) spun off Match Group, it was widely hyped as the "Tinder IPO." While the popular dating app is indeed one of its top brands, Match Group owns a broad portfolio of 45 brands with dating products in 38 languages. Its top brands include Match, OkCupid, Tinder, Meetic, and Twoo. Much of Match's growth comes from acquisitions. Over the past six years, Match acquired 25 companies for a combined price tag of $1.3 billion. Its recent acquisition of online dating service Plenty of Fish is expected to close in the fourth quarter of 2015. In addition to its dating portfolio, Match also owns test preparation and tutoring company The Princeton Review.
Tinder. Source: Google Play.
Across that system, Match had 59 million monthly active users (MAUs), 4.7 million of whom were paid members as of Sept. 30. The group's total revenue rose 10.6% annually to $888 million last year, while its net earnings climbed 17.5% to $148 million. Most of the company's revenue is generated by regular membership and sales of "a la carte" items. The company claims that 68% of new registrations on its dating services during the first six months of the year came from mobile devices thanks to apps like Tinder. The company claims that this market shift has attracted more younger users to its ecosystem.
Looking ahead, Match plans to keep growing through a blend of free and paid features. An undisclosed portion of its IPO proceeds will be used to pay back debt owed to IAC, which will retain control over Match through total ownership of its class B shares. Match's portfolio is diverse and its growth is steady, but there's a lingering risk that an Ashley Madison-style hack could derail its top brands.
Which is the better IPO?
Based on their business models, it's clear that Match is a better pick than Square. Square faces too much competition in the online payments market, and doesn't have the payments volume to compete against heavyweights like PayPal. Square will also have a tough time turning a profit, since it can't raise transaction fees without losing its competitive edge, but must spend more heavily to develop and market new services. Match's growth isn't as explosive as its "Tinder IPO" label suggests, but it seems like a stable and profitable way to invest in the evolution of online dating.
