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Square’s IPO Price: Conservative Or Realistic?

When it comes to IPOs, $4 billion is nothing to sneeze at, but when putting that number next to Square, it’s actually a letdown. 

Bloomberg reported today (Nov. 6) that the mobile payments company is looking to grab a valuation of as much as $4.2 billion through its IPO, according to documents filed with the Securities and Exchange Commission.  That’s a far cry from the $6 billion that had been batted around when the company went through its most recent funding round.

That begs one very big $4 billion question: Just how big is the disconnect that is yawning between what the private markets will pay for a company in the FinTech space – and what will the public markets, which have been notoriously fickle as of late, pay?

For Square, this is not really good news – but it may be company-specific rather than a tell on the IPO landscape itself. Consider the fact that Square has the outstanding issue, and an unusual one, where its leader, Jack Dorsey, also has responsibility at Twitter, and there has been much speculation in the trade press that he may be spread a bit thin.

In terms of the offering itself, Square is looking to bring its shares public at a range of $11 to $13, with the ultimate “set aside” of 4 million shares for the company, indicating that it will raise more than $400 million, noted Bloomberg. The $4 billion tally comes through the total offering of 323 million shares that will be outstanding after the IPO.

And, as has been widely reported, the company is looking to raise funds to boost working capital even as it enters an environment where net losses may continue. That’s on a revenue base that saw 2014’s top line at $850 million, up from $552 million in 2013. The revenue run rate for this year looks to top $1 billion – and yet Square has warned that its growth rate may decline, due in part to the looming end of the Starbucks agreement that has made up a hefty mid-teens percentage of Square’s revenues. Of particular interest to this relationship is the fact that, according to the S-1, Square is selling more than 2 million shares held by Starbucks for roughly $16.80; that’s above the IPO range and should Starbucks not get that price, Square has to make good on the pricing and pay up the difference.

So now it remains to be seen what the interest garnered in a road show may be. Square may in fact find that the IPO range it just set is conservative enough so that investors feel like they are getting a bargain – and that would buoy the price when shares actually do come to market. That may be a long shot, and if not exactly headed toward extinction, one wonders if the unicorn may have its wings clipped a bit – and that could stymie other companies coming to the public markets.  

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