Square IPO Confirms That Talk of a Correction by Year End Is Just Noise

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When Twitter Inc. (NYSE: TWTR) and Square Inc. (NYSE: SQ) co-founder Jack Dorsey was thinking of a name for his aggregator app, Squirrel was a good contender. Square was chosen from the expression square up, as in paying off your debts, and generally not having to do with a tree rodent can be considered a plus in the marketer’s mind. Yet it might have been part prophecy, considering how much Square went up 45% Thursday, paying off a poetic IPO debt after its initial flop at market open.

The whole intraday movement bears a strong resemblance to a microcosm of what happened with Facebook Inc. (NASDAQ: FB) at its own 2012 initial public offering. Initially an embarrassment, anyone who held on from the beginning is up 200%.

Although originally the Square IPO had been planned to sell at $11 to $13 a share, it was downgraded to an offering price of $9, making it $80 million less than hoped. Yet the market bounced in enthusiastic response to the discount and pushed it up to $13.07 at market close Thursday, the high end of what was originally hoped for at open.

By Bloomberg’s calculations, this means an original private investor from 2009 made about 20% on the IPO, and it also means that Dorsey has made the company millions so far. Questions whether he can lead two companies, as well as the health of the entire high-tech and aggregator industry, seem to be answered at least for now in the positive. But it does bring to light the IPO estimators’ difficulty in setting real value.

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The larger story here is that loose money is ready and waiting to pile onto any seemingly bad news to pick up discounts. One of the best gauges of the volume of money available for investment is the response to a big IPO offering. By what happened Thursday, it’s clear the money spigots are flowing and the Federal Reserve proverbially has your back. Square’s IPO price action puts any correction talk by the meat of the holiday season further into the realm of background noise.

Yet there is still real reason to be wary longer term. Square is not profitable, and not all hi-tech companies are showing cherry pictures. Twitter (Dorsey’s other half) has recently experienced some drastic downside. Its stock fell below the original IPO price in the past month, which may explain why Square was undervalued for the IPO. Twitter, Pandora and Groupon are all now selling less than their original IPO prices, which should make Dorsey and investors cautious.

The money is flowing for now. But if the flow lets up, Square and its shareholders could still get themselves into some trouble.

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