Square Inc. (NYSE: SQ) stock is down 6.5% since its first-day close of $13.07 on Nov. 19. And our Square stock price prediction sees SQ falling lower in 2016.
Square is a financial tech startup founded in 2009 by Jack Dorsey and Jim McKelvey. The company provides a mobile payment service for phones and tablets. Its primary product is the Square Reader software, which plugs into a standard headset jack and lets users accept credit and debit card payments. Each Reader costs about $10.
Many investors thought the Square stock price would see long-term gains after its highly anticipated debut. Despite popping 45.2% on its first day, the Square IPO failed to meet expectations as it priced below the $11 to $13 range at $9 a share. The company only raised $243 million and was valued at $2.9 billion - less than half of its private valuation a year earlier.
The Square stock price quickly fell in the wake of the lackluster IPO. It peaked at $13.83 on its second day of trading before falling 9% during the week leading up to Thanksgiving. Yesterday (Tuesday, Dec. 22), shares were down 0.12% and trading at $12.27 a share.
And we see two important factors dragging Square stock lower in 2016...
Two Reasons Why Our Square Stock Price Prediction Is Bearish
The first reason why the Square stock price will fall in 2016 is simple - the company is far from profitable.
During the first six months of 2015, Square raked in $560.6 million in revenue - a 51% increase over the same period in 2014. Despite big revenue growth in 2014, the company incurred $850.2 million in losses.
About 11% of this year's sales came from its partnership with Starbucks Corp. (Nasdaq: SBUX), which started selling Square Readers at all U.S. locations in 2013. However, Square has actually lost $71 million from the partnership.
The company is already in a $77.6 million hole this year and openly said in its IPO filing that it may never turn a profit.
But millions in losses isn't the only factor that will send the Square stock price lower in 2016...
The second factor that will hurt SQ stock next year is the weak IPO market.
In 2015, IPOs saw an average decline of 2.8% from their offer prices. That's significantly worse than the average 21% return for all 2014 IPOs. There were only 170 IPOs in 2015, down 36% from 275 deals a year ago.
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According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, IPO investing is always risky for retail investors. Traders who don't work on Wall Street or own a hedge fund can see huge losses if they're not careful.
"IPOs are little more than a get-rich-quick scheme that's so heavily stacked against you that it makes the house odds in Vegas seem downright conservative," Fitz-Gerald noted last June.
A good rule-of-thumb for new stocks like Square is to wait at least three quarters before considering investing. It's important for the company to prove it's worth your money by boasting a few strong earnings reports.
That's because one disastrous earnings report can send a stock price plummeting. Handmade marketplace Etsy Inc. (Nasdaq: ETSY) hit the market last April and posted a huge loss of $36.6 million in its first earnings report. Shares responded by tumbling more than 19%. The numbers reflected how far away Etsy is from becoming profitable.
With millions in losses and no guarantee of profitability, Square could see the same fate as Etsy. After all, ETSY stock has crashed 71% in 2015 and is one of the worst-performing IPOs of the year.
"IPO hype is based on what 'could be,' not what 'is,'" Fitz-Gerald said. "Many times management cannot make the jump, and you do not want to pay the price for finding out which is which."
Alex McGuire is an associate editor for Money Morning who writes about the IPO market. Follow him on Twitter for news on the biggest upcoming IPOs.
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Should I Buy Square Stock? The Square IPO is one of the most anticipated deals of 2015. Investors are hoping it will revive the sluggish IPO market, which only saw one tech deal last quarter. But is Square a good investment? Here's everything you need to know...