It would seem that Square Inc. had a spectacular first day as a public company Thursday, with shares soaring 45%.
But that percentage gain looks less impressive when you consider the actual dollars the company took in.
The mobile payments and financial services company raised $243 million in cash in the initial public offering. But it could have taken in $351 million had it judged the public market more accurately. Originally seeking a price as high as $13, it ended up selling 27 million shares for $9 each, only to see the public bid the stock up to $13.07 at closing time on the New York Stock Exchange.
The gap between what investors are willing to pay and what start-ups and investment bankers think the stock is worth reflects a skittish public market that doesn't always buy into Silicon Valley's hype machine. Unicorns — or tech companies that are valued at more than $1 billion — are largely untested on Wall Street. And a shaky market has caused investors to dial back the frenzy that surrounded earlier public offerings.
Square's total value now is pegged at $4.2 billion, an impressive amount for a 6-year-old company without profits. But it's also a disappointment: Just a year ago, Square sold shares to private investors at $15.46 a share in a $150-million round that valued the company at $6 billion.
So, although Square's stock was up 45%, its total value is far lower than some of its private investors were counting on.
"Some of the things tech companies could have gotten away with a couple years ago, they can't now," said Francis Gaskins, editor and president of IPOdesktop in Marina del Rey. "Institutional investors are more conservative; they want to see stronger fundamentals. Now, they want to know what is the rate of growth in the top line revenue and how soon can they break even."
There are benefits to a big first-day pop. It creates headlines and generates excitement around the stock.
"Square priced the IPO to incentivize and leave a good taste in investors' mouths," said Josef Schuster, founder of IPO research and investment house IPOX Schuster. But, he said, "we'll see how the medium- to long-run looks."
In the long run, though, a big first day pop doesn't mean much. Some of those companies tank, while others soar.
There are plenty of reasons to wonder where Square will end up. Investors appear to be concerned about the San Francisco company's ability to distinguish itself in a crowded field of payment services that includes PayPal, American Express, Visa, Google and Apple.
There are also questions about how Jack Dorsey, chief executive of both Square and Twitter, will split time heading both companies.
Square generates 95% of its revenue from retailers, restaurants and other businesses that pay the company a fee to process payments.
In a Securities and Exchange Commission filing, Square said losses rose to $154 million last year on $850 million in revenue. In 2013, its losses totaled $105 million on $552 million in revenue.
Jay Ritter, a finance professor at the University of Florida, said that despite the initial price slash, Square fared better than other companies that have resorted to the same strategy.
Since 1980, there have been 2,236 IPOs in which the offer price was cut to below the minimum file price range, and on average the price jumped just 3% on the first day of trading, he said. Only 36 of those companies saw their stock jump 40% or more on the first day of trading.
"There is that cost to Square that they're not raising as much money as they could have," Ritter said. "The underwriters misestimated what the market was willing to pay."
The lower-than-expected price also means that Square also must fork over additional shares, worth $93 million, to some investors — a penalty that was built into its October 2014 round of funding that kicked in because the IPO priced below a predetermined threshold.
Dorsey was in New York on Thursday, his 39th birthday, for Square's debut. Instead of ringing the bell from inside the stock exchange, the company founder stood on the street with his mom, who used Square to buy a bouquet of flowers. The purchase sent off a beep, which Dorsey said signaled the start of trading inside.
"This is the first time the market has been opened outside," he said in a live stream on Periscope, a Twitter product that lets users broadcast what's going on around them.
Meanwhile, Match Group Inc., which owns online-dating platforms such as Tinder and OkCupid, opened trading at $13.50 on Nasdaq and closed its first day up 23% to $14.74. That gives the company a market cap of $3.54 billion.
The dating company had raised almost $400 million in its initial public offering, pricing the shares at $12 apiece, the low end of its projected range.
The initial public offerings come at a time when the multibillion-dollar valuations of tech stalwarts are being called into question.
Mutual fund company Fidelity Investments recently lowered the estimated value of its stakes in private tech companies such as Snapchat, Dropbox and Zenefits.
Other recent tech IPOs such as Box, Alibaba and GoPro have struggled to maintain momentum after their debuts.