Even After The Massive Square IPO Discount, Investors Should Avoid The Stock

The long-awaited Square IPO (SQ) took place last week, attracting a lot of attention from the tech and financial sectors. The company is led by Jack Dorsey, the CEO of Twitter (NYSE:TWTR). Square is a high-profile payment processing unicorn that was valuated on the private market at $6 billion. The company has faced a negative sentiment since it filed for IPO. This negative sentiment was caused by the correction in the markets and the mutual funds private investments revaluation, as described in an earlier article about the upcoming burst of the private valuations bubble.

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To tackle the negative sentiment and drive higher demand, Square substantially discounted its IPO price compared to the latest series E funding round that took place last year. As shown in Chart 1 below, Square’s initial IPO price was almost 50% lower than the E series price that immediately attracted a lot of attention and drove the opening price 23% higher to $11 on the IPO day.

After the opening bell, Square stock price rose to $14.78 before settling at $13.06, which reflected a 45% return on the first day of trading and a $4.2B market cap. Even though Square had not reached the series E price during the first day of trading, the IPO was very successful compared with the pessimistic estimations in the market. However, since the first day pop, Square stock price has already corrected by 7%, and it is now only 35% above its initial IPO price, which reflects an even smaller market cap of $3.9B for the once $6B company.

Square IPO attracted much attention from both the tech and financial sectors, which wanted to see how the market reacts to a beaten-down unicorn IPO during a correction period in the public markets. Financial institutions can be fairly satisfied with the outcome. First, early investors in Square were protected by a ratchet mechanism that guaranteed them a 20% upside above the series E price. Second, investment firms could buy Square’s shares relatively cheap and sell them to the public at the opening price of $11, while price remains significantly lower than the latest funding round. For financial institutions and investment firms, Square’s IPO indicated that future unicorn IPOs could also beprofitable, as long as the discount is deep enough and early investors are protected.