Square’s Upcoming IPO Highlights Unicorn Companies
Updated from 2:51 p.m. to include price in the third paragraph.
Square's forthcoming IPO could have significant implications for the IPO market and for so-called unicorn companies that flaunt valuations north of $1 billion, according to one expert.
"All eyes are going to be on Square from anyone that has a venture capital investment that's a billion dollars or greater," says Kathleen Smith, principal of Greenwich, Conn.-based Renaissance Capital, which manages IPO-focused ETFs. "The IPO market has not seen many [unicorn companies], and they've been stuck in private rounds, mainly because the IPO market is pretty price sensitive. I think there's some worry that the ones who do come out are going to be discounted like Square."
Square priced at $9a share, valuing the mobile-payments giant at $2.66 billion, which Smith says is around 50% below the last round of private financing. "So Square has already taken a pretty good haircut." Though she says a debut price near the range mentioned above is a fair valuation.
Meanwhile, analysts are concerned about Square's profitability. The company posted a net loss of some $78 million during the first six months of 2015, despite having racked up 2 million customers in just six years.
"They've been pioneers in the small-business payments space, and that's their leadership," she adds. "They're just now about profitable on a cash-flow basis, but we think it will take time for it to get the kind of margins that the others in the industry have. Is a company that is servicing small business able to get margins when the volume is less for small business?"
Another concern for Square? It's leadership. Square founder and CEO Jack Dorsey is also a cofounder of Twitter (TWTR) - Get Report . Last month Square added Twitter CEO duties to Dorsey's resume, leaving a host of questions about whether it's plausible for him to run both companies at once.
"This setup is not ideal whatsoever for an investor," Smith says. "We want to see the CEO be totally committed to the one company and that's not the case here. That's a negative for investors. We want to see all of Jack Dorsey's attention on Square."