Digital Transactions Authoritative, insightful and timely information for payments professionals
By Jim Daly
Merchant processor Square Inc. priced its initial public offering of stock late Wednesday at $9 per share, about 25% lower than it had hoped for, but positive investor sentiment lifted the stock Thursday morning in its first day of trading on the New York Stock Exchange. Square opened at $11.20 per share and was going for about $13.60 as of 11:00 a.m. Eastern—more than 50% above the IPO price.
The IPO results and early trading, along with comments from payments-industry experts, suggest wide differences of opinion about what the high-profile processor, whose chief executive Jack Dorsey also is chief executive of Twitter Inc., is worth. Reports in the financial press last year estimated Square was worth about $6 billion based on its funding rounds in the private market. But ahead of the IPO, Square stated an expected per-share price range of $11 to $13, which valued the company 30% lower than the earlier estimates. At $9 per share, Square would be worth only $3.2 billion.
Why Square got only $9 for its IPO is a matter of debate. Against a stock-market downdraft, the IPO market has been tough most of this autumn. All the IPOs in September and October went for discounts, with the average price on 23 deals 20.5% below their stated mid-point range, according to Greenwich, Conn.-based Renaissance Capital LLC, which monitors the IPO market. Processor First Data Corp. had hoped to get $18 to $20 per share, but it ended up pricing its long-anticipated IPO at $16 on Oct. 14.
But payments-industry analyst Gil Luria, managing director at Los Angeles-based Wedbush Securities, wonders if Square accepted a lower IPO price—the price at which the deal’s underwriters buy shares from the company to then re-sell in the market—in order to get a “pop” on the first day of trading knowing that initial investors were willing to pay a higher price, thereby giving the impression of a strong IPO.
Based on proceeds of 25.65 million shares going to Square, the San Francisco-based company raised an estimated $230.9 million before underwriting expenses through the IPO. Luria estimates Square might have gotten $100 million more in cash had it held out for a higher IPO price.
“Square decided to trade it away in order to get this impression of this pop,” he says.
Payments-industry consultant Eric Grover, principal of Minden, Nov.-based Intrepid Ventures, says of Thursday’s upswing: “I don’t know what people are thinking. The fundamental story we have here is a high-growth, low-profit company providing payments to small merchants. Clearly people are valuing it based on a hope it’s going to morph into something else.”
Square spokespersons did not respond to Digital Transactions News requests for comment.
Founded in 2009 to provide payment services to individual sellers and small businesses, Square has moved up-market and is on track to process $32 billion in charge volume this year. But it lost $131.5 million in 2015’s first three quarters and lost money in the three preceding years, according to its registration statement. Square’s contract to process payments for Starbucks Corp. will end next year.
“If one believes the business is going to stay fundamentally as a new-age ISO or acquirer, then it’s grossly overvalued,” says Grover.
Only about 8% of Square’s 355 million shares were sold in the IPO. The rest are held by private investors and insiders. Luria predicts Square will do a secondary stock offering within a year to bolster its finances.
