The Square Stock Price Will Continue to Forfeit Early Gains

The Square stock price opened on the NYSE Nov. 19 at $11.20 and closed at $13.07, offering investors a profitable first day of trading.

For investors able to get in on the $9 IPO offering, the Square stock price provided 45.2% gains on the first trading day. That's impressive considering the average first-day gain of 2015 IPOs was 14% before SQ debuted.

woman-with-newspaperThe IPO launch was successful, and Square just received an infusion of $36 million. Yesterday, the underwriters for the SQ offering exercised overallotment options and bought an extra 4.05 million shares at the IPO price of $9, according to Forbes.

Current shareholders also have good news to look forward to with a collaboration between Square and Apple Inc. (Nasdaq: AAPL). Square's new card reader will accept Apple Pay and is available for pre-order. It will ship in early 2016, according to TechCrunch.

The Square stock price was up between 1.50% to 2% in early morning trading today, reflecting the recent positive Square news.

But investors shouldn't let the most recent Square Inc. (NYSE: SQ) news overshadow the bigger picture...

There's a very serious issue that Square has yet to address. In fact, Square gave investors a clear warning why they shouldn't even invest in SQ stock in the first place.

Here is Square's warning to investors in its IPO filing...

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The Square Stock Price Is Excessively Overvalued

The information in Square's IPO filing offered a few important words of warning for potential investors.

"Our business has generated net losses, and we intend to continue to invest substantially in our business," the Square IPO filing said. "Thus, we may not achieve or maintain profitability."

Square not achieving profitability is one thing, but the anticipation around the IPO may have caused early investors to completely disregard Square's massive losses.

Since 2012, Square saw its losses increase by 80.75%. Here are Square's net losses since 2012:

  • 2012: $85.2 million
  • 2013: $104.5 million
  • 2014: $154 million

When defending Square, some investors like to point to out that Inc. (Nasdaq: AMZN) wasn't profitable when it went public on May 15, 1997. In fact, Amazon didn't expect to make profits for up to five years after it was publicly traded.

But there's one key difference between Amazon and Square; Amazon's business model allowed the company to have massive scalability.

After starting off as a simple bookseller, Amazon now builds its own tablets, offers a streaming video service, and has a home grocery delivery service. Square doesn't have that scalability and will be confined to the mobile payment processing industry.

Another unpleasant reality Square shareholders have to deal with is CEO Jack Dorsey running two companies simultaneously.

Elon Musk and Steve Jobs may be success stories when it comes to dual-CEO roles, but Dorsey isn't running a company with strong fundamentals. He has to completely turn around the sluggish Twitter Inc. (NYSE: TWTR) stock, which has fallen below its IPO price of $26 per share several times in the last year.

In fact, the Square IPO filing also warned investors that Dorsey is a risk factor for Square. "This may at times adversely affect [Dorsey's] ability to devote time, attention, and effort to Square," the filing said.

The initial IPO hype drove up the Square stock price, but it will come crashing down unless the company finds a way to reach profitability.

That's why Money Morning provided a three-step guide to investing in Square stock that you need to read now...

Jack Delaney is an associate editor for Money Morning. You can follow him on Twitter and follow Money Morning on Facebook.