Jack Dorsey, Square's CEO, has been receiving plenty of media attention ahead of the Square IPO, but he may actually end up being one of the biggest risk factors for Square stock when it hits the market.
You see, Dorsey just took on the role as Twitter's permanent CEO on Oct. 5. Potential Square investors want to know if the Twitter cofounder can handle a dual role as Jack Dorsey, Twitter Inc. (NYSE: TWTR) CEO and Jack Dorsey, Square CEO.
In Square Inc.'s (NYSE: SQ) IPO release, the company even acknowledged that the dual roles could cause conflict.
"This may at times adversely affect [Dorsey's] ability to devote time, attention, and effort to Square," the Square IPO filing stated.
The biggest issue is that Dorsey needs to completely overhaul Twitter.
Stagnant user growth, increased competition from Instagram, and difficulty using the service are all issues Dorsey has to address. Turning Twitter around and running Square is a tall order.
Individuals like Steve Jobs and Elon Musk, however, have shown that overseeing two companies can be done. Musk is praised for his ability to handle his dual CEO roles at Tesla and SpaceX, as well as his chairman responsibilities with SolarCity.
Musk recently offered insight into running two companies at the Vanity Fair New Establishment Summit, according to Fortune. When asked at the summit how he manages both roles, Musk simply replied, "I wouldn't recommend running two companies. It decreases your freedom a lot."
This is Dorsey's second time running Twitter. Dorsey was ousted as CEO in 2008 after reportedly leaving work early for yoga classes and fashion shows. Twitter cofounder Evan Williams took over the role, but Dorsey returned in 2011 to as an executive chairman.
Now, Dorsey will list the Square IPO price between $11 and $13 per share. At $13 per share, Square will have a valuation of $4.2 billion.
But before investing in Square, there is a huge, glaring issue with Square stock that investors need to know about...
This will be a hot IPO, but investors need to realize that Square isn't profitable.
Square reported net losses of $85.2 million in 2012, $104.5 million in 2013, and $154.1 million in 2014. In fact, Square admitted that the company may not be profitable for years.
"Our business has generated net losses, and we intend to continue to invest substantially in our business," the filing said. "Thus, we may not achieve or maintain profitability."
The financial situation may appear even bleaker since Square recently lost Starbucks Corp. (Nasdaq: SBUX) as a client. Square started working with Starbucks in 2012, and Starbucks accounted for 14% of Square's revenue in 2014.
While this would be devastating for most companies, it could end up helping Square...
You see, Starbucks accounted for 11% of Square's total sales in 2015, but Starbucks also accounted for 21% of the transaction costs, according to CNN Money.
Since working with Starbucks, CNN Money reported that Square lost $71 million. The move was supposed to give credibility to Dorsey's startup, but it was one of the biggest reasons why Square loses money.
For Jack Dorsey, Square's lack of profitability and his numerous responsibilities will remain major risks moving forward. But there is another issue that hardly any investors know about.
Right now, Dorsey has a direct investment in a third company that is affiliated with both Twitter and Square. And it has charged the two tech companies millions in consulting fees...
The details are murky, but Jack Dorsey reportedly has a direct ownership interest in a marketing company called West Studios LLC.
West Studios LLC doesn't have a website, but it has appeared on both IPOs for Twitter and Square.
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In Twitter's 2013 IPO filing report, it was noted that Twitter paid West Studios LLC over $2 million in marketing and communication services between 2011 and 2012. Now, Square disclosed in its IPO filing that it has incurred $1.2 million in consulting service fees from West Studios LLC, according to The Wall Street Journal.
It may not be particularly unusual that Twitter or Square would work with an ad agency. A direct investment in a third company, however, means that Dorsey once again has another distraction. The Square IPO will certainly be a hot topic of discussion, but investors need to ignore the IPO hype.
"Too many investors hear of a 'hot IPO' and try to get in on the action without doing any homework at all," explained Money Morning Defense & Tech Specialist Michael A. Robinson. "That's a recipe for a hefty loss."
With all 2015 IPOs seeing an average decline of 2.2% from their offer price and Square not generating a profit, investors should stay away from the Square IPO. For Jack Dorsey, Square's IPO could be another headache in his long list of issues.
Jack Delaney is an Associate Editor for Money Morning. You can follow him on Twitter and follow Money Morning on Facebook.
