After filing to go public a couple weeks ago, Square this morning announced that it would sell 27 million shares in its upcoming initial public offering (IPO) at $11 to $13 a share, suggesting a best-case $4.2 billion valuation once the mobile payments company hits the public market.
Based on its last funding round, Square was valued on the private market at $6 billion, amounting to a 30 percent drop in a year. But nothing has significantly changed the Square business except for the fact that it’s transitioning from the private to the public market.
For unicorns, this news is not an exception but increasingly the rule. In fact, 40% of the unicorns that went public since 2011 are now trading either flat or below their private market valuations, giving statistical credence to the intuitive consensus that most unicorns are overvalued.
As Steven writes in the above piece, it’s obvious that private financing valuations can’t be fully trusted when you see companies like Slack and Snapchat becoming unicorns, the team communication platform in its first year of existence and the mobile chat app before even generating revenue.
With Square, the reasons for bringing its sky-high valuation back down to earth a little are hidden in plain sight.
For one, the IPO market is in a poor state right now. In the third quarter of this year, for the first time since 2011, “average IPO returns were negative (-4%) and more IPOs ended the quarter below their offer price than above it,” according to Renaissance Capital.
Secondly, Square isn’t profitable. Its revenues are growing–$560.6 million for the first six months of 2015, a 51 percent increase over the same period a year earlier–but that growth is slowing. Net loss for that period was pegged at $77.6 million and gross profit was $164 million.
Last but not least, there’s the issue of Square’s part-time CEO, Jack Dorsey, who returned to Twitter to replace CEO Dick Costolo. And Twitter, whose investors have been consistently displeased with the company’s performance and lack of growth since its IPO two years ago, needs just as much attention as Square.
In August, the social networking service dropped below its IPO price of $26, but has since rebounded slightly to today’s share price of $28.
Investors and analysts are skeptical that Dorsey, as permanent CEO of two once-heralded tech companies with lagging financials, can turn two ships around. Add to all these factors the very real threat of competition–neither Square’s mobile payments nor Twitter’s information network are completely defensible services–and you have a recipe for pessimism.
It will be interesting to see whether the increasing realism of the public markets–and their sobering effect on unicorns filing for IPOs–will eventually tone down private market valuations.
