Call it a moral victory for the unicorns.
Shares of Square rose more than 45% in early trading Thursday morning. But it’s still a sign of weakness for Silicon Valley’s ballyhooed startups.
But Square priced its initial public offering Wednesday night at $9 a share — well below its expected range of $11 to $13.
There’s no sugarcoating this. Square failed to excite the managers of big mutual funds and hedge funds, the so-called smart money on Wall Street.
The stock’s early gains merely showed that investors think Square might be a bargain near the original $11 to $13 price range.
That could be a bad sign for other unicorn startups looking to one day go public — billion dollar startups like Airbnb, Dropbox, Pinterest, Snapchat and Uber.
Square raised $243 million in the stock sale. And at a price of about $12, the company is valued at $3.9 billion. Last year, Square raised money from venture capitalists at a value of $6 billion.
“In an IPO market where hype and buzz was a far greater driver of IPO value than fundamentals, Square might have done very well. But the IPO landscape has changed in recent months.” said Brian Hamilton, chairman of research firm Sageworks.
Why is there such a discrepancy between the prices that Silicon Valley and Wall Street are willing to pay for Square?
For one, Square’s IPO comes at a tough time for newish tech companies in general.
And shares of another unicorn, Pure Storage(PSTG), have barely budged since going public last month.
That’s because Wall Street tends to be more short-term focused and less forgiving of a company’s shortcomings than VCs who can afford to take a longer-term view.
Square, like many other unicorns, is not profitable. That’s strike one.
“Even at a large discount, this is a very problematic IPO,” Hamilton said. “Much has been made of Square’s greatly reduced valuation, but this is still a highly flawed company with a multi-billion dollar price tag.”
Investors also seem concerned about tough competition from rivals First Data(FDC) and PayPal(PYPL, Tech30) as well as the threat from the likes of Apple(AAPL, Tech30), Google(GOOGL, Tech30) and Facebook(FB, Tech30) in the mobile payments market. Strike two.
And then there’s the Dorsey factor. He has to convince investors that he will be able to effectively run both Square and the struggling Twitter. Strike three! You’re out!
“Twitter has a lot of work ahead of them which will require a lot of Dorsey’s time,” said James Gellert, CEO of Rapid Ratings, an independent research firm.
“My concern is that he can’t be in two places at once, so at the end of the day someone’s being shortchanged — Twitter shareholders or Square shareholders,” he added.
Of course, Square could turn things around and become a Wall Street stud.
Facebook’s IPO wasn’t the smoothest of debuts. And look at it now.
But Facebook was profitable when it went public in 2012. Square still has much to prove.
It will take more than a celebrity board of directors (Mary Meeker, Larry Summers, former Brown University president Ruth Simmons and NBA legend Magic Johnson to name a few) to convince Wall Street that Square is worth buying.
Unfortunately for its investors, Square looks more like the current Los Angeles Lakers than Magic’s Showtime teams from the 80s.