Shares of Square Inc, the mobile payments company co-founded and still run by Twitter Inc Chief Executive Jack Dorsey, soared 64% in their market debut, following a marked-down initial public offering, countering the negative sentiment that has nagged at Silicon Valley startups in recent weeks.
The steeply discounted IPO price, at less than 60% of the company's last private valuation, had raised questions about the prospects of other so-called 'unicorns' - startups worth at least $1 billion - that might want or need to go public.
A number of tech IPOs have performed poorly over the past year, and mutual fund investors, including Fidelity Investments, have been marking down the value of their private tech holdings.
Dispelling some of the gloom, Square's shares jumped to a high of $14.78 in early trading on Thursday, 19 November, and closed at $13.07, booking a 45% gain.
The stock pop came after the IPO was priced at $9 late on Wednesday, 18 November, well below the expected range of $11 to $13 and even farther below the $15.46 price of Square's last private financing in 2014. It bucked a difficult stretch for IPOs, which are trading down about 5% for the year.
Investors wary of Square's valuation probably waited until the shares landed on the public market to buy, analysts said, and the weak price set on Wednesday, created a pile-on Thursday morning that drove the stock higher.
"The IPO buyers have very healthy scepticism about unicorn valuations," said Chris Bulger, managing director of Bulger Partners, a tech advisory firm in Boston.
Despite Square's 42% valuation drop from its last private financing round, most backers scored a payday. Investors who bought shares a year ago were protected by a 'ratchet', ensuring they would get a 20% return, and some early-stage investors bought Square at less than one dollar a share.
"It's still a good game," Bulger said. "Just in the last two rounds you're not getting venture capital-like returns for the risk you are taking."
Square's strong start was followed by a positive debut by online dating empire Match Group Inc, whose shares finished the day up nearly 23%.
Tom Donino, co-head of trading at FNY Capital Management, said it is unusual to see a stock trade up so much after pricing below the expected range, as Square's did.
"There's obviously retail and other demand for the stock, but the pricing seems strange," he said.
He added that "the fact the stock is now this strong will probably quash" the bearish sentiment around private-company valuations.
Square raised $243 million in its IPO, money the company needs to cover heavy losses. It reported a loss of $131.5 million in the first 9 months of the year after losing $117 million in the same period a year earlier, though revenue rose 49% to $892.8 million.
The debut comes at a time when slowing global growth and uncertainty about the timing of a U.S. interest rate hike have kept investors on edge.
Ken Polcari, director of the NYSE floor division at O'Neil Securities, said he thought the low price of the offering, which cleared the way for the first-day pop, was a smart move in the current market environment.
"Those particular types of companies - these unicorns that have these crazy valuations - you are going to see some of them become more conservative in their pricing because it makes sense. What they don't want to do is damage themselves by trying to be so super-aggressive."
