In Depth

For Square, IPO Looms Against Negative Backdrop

The unicorn has had its wings clipped – and now comes the time to see if it can still fly.

Pretty much everyone knows that the Square IPO faces one initial moment of truth today, as the shares are set to price this afternoon. The clipped wings? That would be the $11 to $13 a share that has been floated up and down Wall Street as the price range, which implies a $4 billion-plus valuation, and which is leagues below the $6 billion valuation the firm garnered in its last fundraising round just last year.

The haircut speaks volumes to the conservatism that is creeping into the public markets, with both investors and management teams quietly taking down expectations.

But there could be a silver lining in this cloud. It could be the case that the price range is so conservative that it spurs some enthusiasm, with the potential to climb or at least have some support at the stated range once the stock begins trading on Thursday. That’s a big question mark, and it may be mere whistling past the graveyard.

As of press time, at least one news source (Dealreporter) had reported that demand looked likely to push shares to trade at the low end of the offering range, or even below. And the fact that the deal is oversubscribed at that level of interest – which loosely means that more investors are asking for blocks of shares than there are blocks of shares ready to go around – indicates that we could indeed see a busted IPO sooner rather than later.

Simple laws of supply and demand may prove such pessimism short-lived, of course, because even a moribund offering could be turned into a firecracker with a single large block of common crossing hands.

But the first trade of the morning, which could have psychological impact, seems destined to be a bit of a downer, and smacks of investor fatigue.

Just what are they willing to pay for mobile payments as a business? The numbers are still there, and the trends are unmistakable. The company still gets 95 percent of its top line from payments processing, and a much smaller piece of the pie from the capital business, which at least gives some weight to the fact that Square should be valued with a lower multiple (hence the low end of even a conservative IPO range) to reflect a competitive landscape, a slowing growth rate and a new wrinkle on an old business.

High and accelerating growth tends to beget higher multiples, a backdrop not present here … and yet even at $11, the stock still would fetch a price to sales multiple in the high single digits. Not cheap. And the losses incurred thus far mean that looking to a bottom line to triangulate valuations is a lost cause.

Square resolutely has come to market in a time when fellow unicorns like Lending Club have been decimated by the markets, trading roughly half below peak levels. For Square, there are not a lot of positive harbingers in place, and the opening bell is just hours away.

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