Just a day before going public, Square rattled the investor community by pricing its IPO 30% lower than originally expected.
Square has valued the IPO at $9 per share, lower than the projected range of $11 to $13. The market valuation now stands at $2.9 billion, which is way below the $6 billion it raised last year from private financing.
As per analysts, the lowering of the price reflects the looming uncertainty about the payments industry's profitability as well as possibilities of slowing revenue growth in the face of intense competition. With competition from the likes of Google, PayPal, Visa Inc. V , American Express Company AXP and Apple Inc. AAPL , Square has a huge task of proving its business profitable.
The mobile payments company reported revenues of $892.8 million for the first nine months ended on Sep 20, 2015, representing 49% growth year over year but slowing from the same time frame in prior years. Also, it reported a 12.4% year-over-year increase in net losses, which was $131.5 million for the nine months ended Sep 20, 2015.
Investors are also concerned as CEO Jack Dorsey continues to dodge questions as to how he would split his time between Twitter, Inc. TWTR and Square. He is the CEO of both the companies, which are at a crucial juncture. The Square IPO clearly reflects investors' skepticism of the "enormous valuations that venture capitalists are putting on private technology companies."
However, Square's late-stage investors like J.P.Morgan Chase & Co and The Goldman Sachs Group Inc will be protected by a "ratchet, which guarantees them a minimum boost by issuing them more public shares since the IPO has priced below the agreed minimum."
Analysts also obseve that Square's situation reflects a tough IPO market for tech companies in 2015. As per Dealogic, the IPO market for tech stocks has shrunk 53% so far in the year with overall U.S listed IPOs tanking 62%. Not just Square, other companies that launched IPOs this year like online dating company Match Group Inc. and Mimecast Ltd priced their IPOs at the lower end of their projected price range whereas Box Inc. priced its IPO below what was originally estimated. Also, enterprise storage company, Pure Storage, which launched its IPO earlier this year, was not well received by investors.
Square is expected to initially offer 27 million shares of Class A common stock, which includes 1.35 million shares held by a charitable fund created by Dorsey. Square will be listed on NYSE under the symbol SQ.
Square was co-founded by Jack Dorsey, who is now the newly reinstated CEO of social media company Twitter. Dorsey got the inspiration for his second company-he was one of the three co-founders of Twitter back in 2006-when his friend Jim McKelvey had trouble completing a $2,000 sale of his glass products because he could not process credit cards; McKelvey is the other co-founder of Square.