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Square IPO Jumps — But Only After Bankers Chop the Valuation (SQ)

Square IPO - Square IPO Jumps — But Only After Bankers Chop the Valuation (SQ)

The IPO market remains brutal on tech companies, as seen with Square (SQ). While the stock shot up about 51% to $13.60 in early trading, the fact is that the company had to price the deal $2 below the initial range of $11 to $13.

Square IPO Jumps -- But Only After Bankers Chop the Valuation (SQ)In other words, investors were skeptical of the prospects of the Square IPO and definitely wanted a good deal. Keep in mind that SQ stock was valued at over $15 a share less than a year ago (this was through a round of venture capital funding).

OK then, let’s take a deeper look at the Square IPO.

Looking Back at Square

Founded in 2009, the company is a pioneer of the mobile payments space. The company created a plug-in for smartphones to turn them into credit and debit card readers. It was certainly a brilliant idea and the growth was rapid.

It certainly helped that one of the founders was Jack Dorsey, who also was one of the masterminds behind Twitter (TWTR). He had few problems ginning up large sums of venture capital or securing partnerships with marquee companies like Visa (V) and Starbucks (SBUX).

As of now, Square has over two million active sellers and processes over $32 billion in gross payment volume (for the past 12 months). But the company has also expanded into different lines of business, such as payroll, cash advances/loans for merchants, email marketing services and even food delivery. Still, the fact is that about 95% of overall revenues come from the core payments segment.

Yet there is a nagging issue, which certainly was a major factor in the haircut of the Square IPO — that is, the company continues to post massive losses.

In the latest quarter, the net loss came to $53.9 million, which was the highest since 2013. Oh, and sales growth has been decelerating. In Q3, there was a 46% increase to $332.2 million, down from the 52% rate in Q1.

Now, the investor uneasiness with the Square IPO should not really be a surprise. The fact is that the recent volatility in the markets has taken a toll on recent tech offerings. Just look at the following:

Company Year-To-Date Performance
Box (BOX) -44%
LendingClub (LC) -50%
Ooma (OOMA) -41%
Apigee (APIC) -56%
Etsy (ETSY) -71%

But this is no fluke. During the past few years, there have been many highly anticipated high tech deals that have cratered. Just look at the disastrous offerings of Zynga (ZNGA) and Groupon (GRPN).

Other Pitfalls for SQ Stock

However, the issues with the Square IPO may be more than just about market volatility and lack of profitability. After all, the company must fight plenty of tough competitors. Some are well financed startups like Stripe. But of course, there are many mega operators like Apple (AAPL), PayPal (PYPL) and Alphabet (GOOG, GOOGL). Then there are the traditional financial firms, such as American Express (AXP) and JP Morgan Chase (JPM).

Hey, even Starbucks is a potential rival, as the company has hinted that it may license its highly successful mobile platform. And this is definitely stinging for SQ, which formed a partnership with the coffee maker a few years ago.

Unfortunately, the deal has been mostly one-sided — that is, in favor of Starbucks. During the first nine months of this year, the partnership cost SQ $118.5 million but led to only $95.2 million in revenues. Now SQ plans to nix the deal, but this will not happen until the contract expires in Q3 of next year.

Finally, SQ also essentially has a part-time CEO. Jack Dorsey, of course, also runs Twitter, which is in the midst of a major turnaround effort. While he has proven to be adept at creating fast-growing companies, it does seem like a stretch that he can manage two major companies that face tremendous competition.

So in the short run, the Square IPO will probably have nice opportunities for traders, who can make money off the volatility in the stock.

But looking at the next year or so, it’s probably best to avoid SQ stock, given the fierce competition, the decelerating revenue growth and the uncertainties regarding its nascent add-on businesses.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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