|
 The steeply discounted IPO price, at less than 60 percent of the
company's last private valuation, had raised questions about the
prospects of other so-called 'unicorns' - startups worth at least $1
billion - that might want or need to go public.
A number of tech IPOs have performed poorly over the past year, and
mutual fund investors including Fidelity Investments have been
marking down the value of their private tech holdings.
Dispelling some of the gloom, Square's shares jumped to a high of
$14.78 in early trading on Thursday and closed at $13.07, booking a
45 percent gain.
The stock pop came after the IPO priced at $9 late on Wednesday,
well below the expected range of $11 to $13 and even farther below
the $15.46 price of Square's last private financing in 2014. It
bucked a difficult stretch for IPOs, which are trading down about 5
percent for the year.
Investors wary of Square's valuation likely waited until the shares
landed on the public market to buy, analysts said, and the weak
price set on Wednesday created a pile-on Thursday morning that drove
the stock higher.
"The IPO buyers have very healthy skepticism about unicorn
valuations," said Chris Bulger, managing director of Bulger
Partners, a tech advisory firm in Boston.
Despite Square's 42 percent valuation drop from its last private
financing round, most backers scored a payday. Investors who bought
shares a year ago were protected by a 'ratchet', ensuring they would
get a 20 percent return, and some early-stage investors bought
Square at less than a dollar a share.
“It's still a good game," Bulger said. "Just in the last two rounds
you're not getting venture capital-like returns for the risk you are
taking."
Square's strong start was followed by a positive debut by online
dating empire Match Group Inc, whose shares finished the day up
nearly 23 percent.
Tom Donino, co-head of trading at FNY Capital Management, said it is
unusual to see a stock trade up so much after pricing below the
expected range, as Square's did.
"There's obviously retail and other demand for the stock, but the
pricing seems strange," he said. “The fact the stock is now this
strong will probably quash" the bearish sentiment around
private-company valuations, he added.
Square raised $243 million in its IPO, money the company needs to
cover heavy losses. It reported a loss of $131.5 million in the
first nine months of the year after losing $117 million in the same
period a year earlier, though revenue rose 49 percent to $892.8
million.
The debut comes at a time when slowing global growth and uncertainty
about the timing of a U.S. interest rate hike have kept investors on
edge.
Ken Polcari, director of the NYSE floor division at O'Neil
Securities, said he thought the low price of the offering, which
cleared the way for the first-day pop, was a smart move in the
current market environment.
“Those particular types of companies - these unicorns that have
these crazy valuations - you are going to see some of them become
more conservative in their pricing because it makes sense. What they
don’t want to do is damage themselves by trying to be so
super-aggressive."
DORSEY IN THE SPOTLIGHT
Dorsey, who was celebrating his 39th birthday on Thursday, owns 21.5
percent of Square following the IPO and is the company's biggest
single shareholder, with a stake now worth almost $930 million.
[to top of second column] |
The high-flying executive is also trying to run Twitter, another
company with substantial obstacles to growing profits. Shareholders
in both companies have been concerned about Dorsey's dual role.
Square's IPO filings show a net loss of $29.6 million in the second
quarter, ballooning to nearly $54 million in the third quarter.
"Square's financials leave much to be desired," said Brian Hamilton,
chairman of data firm Sageworks. "But there's still a lot to like
here."
Square Chief Financial Officer Sarah Friar said in an interview with
Reuters that the company has been investing heavily in new hardware,
such as chip-enabled card readers, and building out its lending
business, Square Capital.
“The slope of the line is up and to the right in terms of our
operating margin," she said. "So we are going to grow but we are
going to do it in a disciplined way.”
Friar pointed to the consumer trend of shopping less with cash.
“Still, 40 percent of all commerce is done with cash and check, but
slowly that’s eroding. So that’s one big reason for the growth,” she
said.
Square, founded in 2009, has built buzz and a substantial customer
base with a credit card reader that can turn a mobile device into a
payment terminal. It has made its mission to enable any small
business to easily accept any form of payment, and also provide them
with additional services ranging from lending to payroll management.
But the company faces intense competition in the payments market,
with Apple Inc launching its Apple Pay service, Amazon.com Inc
exploring in-store payments, and startups such as Stripe Inc
entering the fray. Meanwhile big banks and card processors continue
to dominate the payment business, and Square has to pay out most of
its gross revenues to banks and credit card networks.
Square sold 25.7 million class A common shares in the offering, led
by Goldman Sachs, Morgan Stanley and JP Morgan. Start Small
Foundation, a charitable fund created by Dorsey, sold about 1.35
million shares. The low offering price triggered a 'ratchet' in
which late-stage investors get an addition share distribution.
(Reporting by Rachel Chitra in Bangalore and Heather Somerville in
San Francisco; Writing by Jonathan Weber and Stephen R. Trousdale;
Editing by Kirti Pandey, Ted Kerr and Bill Rigby)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
