Growing Pain

Should You Invest in Square or PayPal?

The tech bubble is growing again. While the situation is nowhere near as dire as it was during the dotcom

Square made a splash, albeit a small one, on Wall Street last week, opening its initial public offering at a surprisingly low $9 per share. That’s well below the $11 to $13 the company expected to get in its prospectus, but chief executive Jack Dorsey doesn’t seem to care.

Square a Success

That’s because shares rose an astonishing 45% rise, closing at $13.07. While some have declared it a bust because of the low final price, here’s what Square’s IPO really tells us:

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Investors Want to Invest in Tech, but at the Right Price

The tech bubble is growing again. While the situation is nowhere near as dire as it was during the dotcom bubble in the late 90s, tech valuations are certainly a concern.

Take Amazon (forward P/E ratio of 118) and Twitter (45) as examples.

Both of these companies have struggled to be consistent in turning a quarterly profit, yet investors haven’t been shy about investing in them.

Square’s IPO shows that investors are still willing to invest in tech beyond the big four (Amazon, Apple, Alphabet and Facebook), they’re just looking for the right price.

It’s Not about What Wall Street Thinks

Being one of Twitter’s founders and its current CEO, Jack Dorsey knows what it takes to get on Wall Street’s bad side. With Square, however, it seems that he’s less interested in sentiment than he is in getting cash for the company.

IPOs are almost purely driven by emotion — excitement, that is. The vast majority of them sees a huge pop the first day or even week, and then fizzle for a while.

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“It’s all about accelerating the business and that’s what we came here to do today and we did it,” said Dorsey in an interview with CNBC.

He’s not the only one who thinks so. “Sometimes you just need to get the deal done,” wrote Fred Wilson, a veteran venture capitalist and managing partner at Union Square Ventures. “Jack Dorsey did the right thing at Square.”

This Is Just the Beginning

IPOs are funny little creatures. Though Wall Street is usually (look away Amazon and Twitter investors) obsessed with justifying valuations, IPOs are almost purely driven by emotion — excitement, that is. The vast majority of them sees a huge pop the first day or even week, and then fizzle for a while.

The real value comes when the company actually does something with the money it received from the offering.

 

So then the big question is…

Should you Invest in Square or PayPal?

Ever since the PayPal spinoff from eBay, shares have seen ups and downs, but largely been unimpressive. Down 1.69% since its IPO in July, the company generated revenue of $2.26 billion (up 14.7% year- over-year) and earnings per share of $0.31 in its first earnings report.

Because PayPal is more profitable and is more established in the industry, that’s one big win for potential investors. At the same time, however, Square is in growth mode. For example, its first-half sales grew 51% year-over-year, putting investors in a better position for value increases.

There is, however, Square’s leadership to be concerned about. Dorsey’s attention is divided between Square and Twitter, which sows the seeds of uncertainty and should make investors a little squeamish. Having been thrown out of Twitter a few years ago, Dorsey is somehow trying to make a Steve Jobs-esque return, piloting two companies at a time. But is it going to work? Well, let’s just say he’s no Steve Jobs.

Conclusion

Square offers investors growth, but also a lot of risk, what with Dorsey’s divided attention and a volatile beginning (as all tech companies experience shortly after their IPO). PayPal, on the other hand, offers stability and freedom from eBay, which adds significant value by itself. Which one should you invest in? It all depends on how tolerable to risk you are.

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