Do Underwhelming Square, Match IPOs Mean Bubble Trouble?

Nov 19, 2015
Originally published on November 20, 2015 2:03 pm

Two tech startups you know have now gone public: Square (which makes the little white square to swipe credit cards) and Match, the online dating giant. Both companies got nice, first-day pops to their share prices as they started selling for well above the initial price. But interestingly, those initial prices were set low.

Really low.

Square was planning to price somewhere between $11 and $13 a share, which, analysts say, is already pretty cheap. But then, the company went even lower, settling for just $9. That's really, really cheap.

And Match set its initial price at $12, which was on the low end of the company's original expectations.

This could be significant for how we, and the Wall Street, are thinking about Silicon Valley. But before we get into why, let's take a look at each company separately.

Match Not On Top

Unlike many tech startups, Match actually turns a profit. It has millions of active users on Match.com and its other brands, OkCupid and the infamous app Tinder (where you swipe to like).

Plus, Match has been able to create and run new, successful products, which is an impressive skill — especially when it's done without spending a lot of money. (Tinder, for instance, was born in-house at the labs of IAC, Match's parent group.)

All that makes Match a really strong company, says Kathleen Smith, an analyst with Renaissance Capital who is an expert in initial public offerings.

"It has very high profitability for every user," she says. According to the numbers disclosed in a regulatory filing, Match earns $20 pretax for every $100 it collects.

The problem is, Smith says, other companies have tarnished the halo of Silicon Valley with investors. Take Etsy, which went public at $16 a share in April and has since taken a nosedive, to $8.72 on Thursday.

And so Wall Street's clamming up. In 2012, Smith says, a company like Match would have sold for a lot more because back then, investors had an appetite and a tolerance for risk. "That tolerance is no longer in this market that we're in today," she says.

Smith says Match's decision to price at the bottom of its originally planned range of $12-$14 signals a power shift. "It's the IPO investor that's calling the shots here," she says.

Put another way, Match is not on top.

Square Is A 'Breaking Point'

Now, let's turn to the second company that hit Wall Street on Thursday, Square.

"Square had this very unique proposition of allowing anybody to accept credit cards," says Gil Luria, analyst with Wedbush Securities, who recalls Square's glory days: "It was a very novel idea."

In its first couple of years, Square got people to use iPhones and little white dongles to pay with plastic — at farmers markets, art fairs and coffee shops. Its founder, Jack Dorsey (also chief of Twitter), was the man with the Midas touch.

That story has now flipped. As Luria puts it: "It's gotten a lot more complicated."

Which is to say, Square has yet to turn a profit, the market is saturated and there's new, better competition.

And from one perspective, you could look at Thursday's initial trading and say Square is killing it. Sure, it priced at $9, but at its peak the stock soared almost two-thirds above the IPO price. (It closed at $13.07.) It's a pretty successful initial public offering.

Luria doesn't buy it: "Square priced the IPO low, in order for the stock to pop on its first day of trading, to create a perception of a successful IPO."

Perception is key. The prices of Square and Match can fluctuate, but those initial prices — those lackluster prices — they're kind of a cold shower for Silicon Valley.

To Luria, it shows the hype around tech is fading, and Square represents a "breaking point."

The New Mantra

With these companies' lackluster public offerings, there's a palpable shift in Silicon Valley. Local analyst Rajeev Chand, with Rutberg & Co., sums it up: "In today's market there is a bubble, clearly."

It's actually a raging, unsettled debate. But Chand and other analysts say private investors have grossly inflated the value of their startups. According to CB Insights, more than 140 companies are so-called "unicorns," valued at more than $1 billion.

"There are so many companies that have been bid up so high," Chand predicts, "the vast majority of these companies will struggle to live up to the valuations that the private markets have given them."

According to Digi-Capital, the average valuation for mobile internet unicorns dropped from $9 billion to $8 billion in the 3rd quarter of this year.

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ARI SHAPIRO, HOST:

Today, two tech startups you might've heard of went public. One is Square, which makes those little white squares to swipe credit cards. The other is Match Group, the online dating giant. Both companies had nice day-one pops, their stocks selling well above the initial offering price. Interestingly, though, those initial prices were set low, as NPR's Aarti Shahani reports, really low.

AARTI SHAHANI, BYLINE: Square was planning to price somewhere between 11 and $13 a share, which analysts say is already pretty cheap. But then the company went even lower, setting shares at $9. And Match - Match went for 12 bucks - also on the low end. This could be significant. But before we get into how, let's take a look at each company separately, starting with Match.

KATHLEEN SMITH: Currently, they earn $20 pretax for every hundred dollars they collect.

SHAHANI: Kathleen Smith is an analyst with Renaissance Capital.

SMITH: It has very high probability for every user.

SHAHANI: Smith is an expert in initial public offerings. She knows the scene. And in her opinion, Match is a really strong company. It actually turns a profit. It has millions of active users on match.com and its other brands - OkCupid and the infamous app Tinder where you swipe to like. Interestingly, that app was born in-house.

SMITH: That's an impressive skill. And they can do that without spending a lot of money.

SHAHANI: The problem is, Smith says, other companies have given Internet startups a bad name. For example, Etsy, which went public recently, has taken a nosedive. And so Wall Street's clamming up. In 2012, Smith says, a company like Match would have sold for a lot more because back then, investors had an appetite, a tolerance for risk.

SMITH: That tolerance is no longer in this market that we're in today.

SHAHANI: That decision to price at 12 bucks - Smith says it signals a power shift. Match - they're not in control.

SMITH: It's the IPO investor that's calling the shots here.

SHAHANI: They're not on top.

SMITH: They're not on top (laughter). They're not. They're not on top. Oh, you're good.

SHAHANI: Now let's turn to the second company hitting Wall Street today, Square.

GIL LURIA: Square had this very unique proposition of allowing anybody to accept credit cards.

SHAHANI: Gil Luria, analyst with Wedbush Securities, recalls Square's glory days.

LURIA: It was a very novel idea.

SHAHANI: In its first couple years, Square got people to use iPhones and little white dongles to pay with plastic at farmers' markets, art fairs. Its founder, Jack Dorsey, also chief of Twitter, was a golden child - the man with the Midas touch. That story has flipped.

LURIA: It's gotten a lot more complicated.

SHAHANI: Now it's - Square has yet to turn a profit. The market's saturated. There's new, better competition. So one could look at today's initial trading and say, no, Square is killing it. Sure, it priced at nine dollars, but stock ended up soaring and closed above 13 bucks. It's a very successful initial public offering. Luria doesn't buy it.

LURIA: Square priced the IPO low in order for the stock to pop on its first day of trading to create a perception of a successful idea.

SHAHANI: Perception is key. The prices of Square and Match will go up and down, but those initial prices, those lackluster prices - they're kind of a cold shower for Silicon Valley. Luria and other analysts say the hype around tech is fading. Aarti Shahani, NPR News, San Francisco. Transcript provided by NPR, Copyright NPR.