How To Explain Square’s Disappointing IPO Pricing
Cries of “shock wave” and “bursting bubble” greeted Square’s recent IPO pricing. It’s understandable when the IPO is $2B lower than Square’s last round only months ago, in a stock market that has remained stable throughout the year.
However, Square’s public pricing reflects its position as the fastest growing company in the well-defined segment of merchant processors. From our perspective, Square is valued as a fast-growing next generation merchant acquiring/processing vendor, in a group that includes First Data (a recent IPO), Heartland, Cielo, Worldpay (another recent IPO), and several others. While its IPO price is “disappointing,” it is deservedly at the top of this group.
Square is growing 50%+ annually during the first half of 2016, and is heading for $1B in annual revenue. At the midpoint of its IPO range, Square is valued at 9.3x latest 12-month revenue, and nearly 8x run-rate revenue. This multiple is double the 4-5x revenue prevailing across its peer group. A premium is warranted; its peers are only growing 10-15% and markets reward growth most of all.
But when Square is compared to the most “comparable” public company in its category, Brazil-based Cielo, Square looks more than fairly valued. Cielo is growing at 45% pa versus Square’s 50%+, and is trading at 8x latest 12-month revenues. But Cielo is already very profitable and its valuation is therefore only 18x latest 12-month EBITDA. Square, while still losing money, is valued marginally higher than Cielo, which already boasts near 50% EBITDA margins.
The point is: most fin-tech unicorns operate in existing segments, with well-covered publicly traded peers. At IPO, public investors don’t care about previous unicorn status. They value new issues based on multiples in their respective spaces. Even if they are very generous, as in Square’s case, it can look like a failure.
At this IPO value, Square will have done very well relative to its peers and its performance to date. If it weren’t for irrationally exuberant private investors, the fin-tech industry would be celebrating their success.
Posted by Victor Basta @MaExits