WASHINGTON, DC — Shares of online payments start-up Square (NASDAQ: SQBK) began trading in the secondary market this morning, vaulting as much as 64% above the $9 at which they were priced in the primary market.

The “pop” in Square’s stock price suggests the shares were mispriced by the initial public offering (IPO) lead managers (Goldman Sachs, Morgan Stanley, and JPMorgan). It appears the banks may have been excessively cautious in setting the price 25% below the midpoint of the $11 to $13 initial pricing range, such that Square left money on the table.

As the company is a high-profile Silicon Valley start-up, Square’s IPO is being heavily scrutinized as an indication of the public market prospects of other so-called “unicorns” (start-up companies that have achieved a valuation exceeding $1 billion in private market financings).

The number of unicorns has ballooned in the past few years, as growth companies are able to access ample funding without having to go public. According to data from The Wall Street Journal and Dow Jones VentureSource, there are now 128 worldwide, roughly two-thirds of which (84) are U.S. companies.

There is a legitimate concern that the availability of such funding and the drive to find the next Facebook has pushed valuations to unsustainable levels. Sitting on top of the unicorn ranking, Uber was valued at a staggering $51 billion in August.

An article published in the Harvard Business Review this week and co-authored by Clayton Christensen asserts that “Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive.” Pr. Christensen pioneered the notion of “disruptive innovation.”

But it’s another concept, also developed by a Harvard Business School professor, that is arguably more important than any other for a business-focused investor: competitive advantage. Try as I may, I cannot find a source of durable competitive advantage for Square.

If I’m right, and if Square is unable to build one, it’s a grave problem for investors: Only companies that possess that advantage will earn above-normal returns on behalf of their owners over long periods.

Make no mistake about it, Square’s sector is highly competitive. In August, Business Insider counted 24 unicorns in financial technology, five of which could be considered direct competitors to Square with regard to payment card readers, online payments processing, or mobile payments. Those include payments processor Stripe, which is headquartered in San Francisco and was valued at $5 billion in July.

This columnist believes that, in time, the offering banks’ caution is likely to prove more consistent with Square’s actual value than the pop the shares are enjoying today. Even with the pop, the stock remains significantly below the $15.66 per share valuation in its last pre-IPO funding rounding. Justifying that valuation now looks like a case of trying to square the circle.

The post Square 1 Financial Inc’s IPO: Investors Are Trying to Square the Circle appeared first on The Motley Fool UK.

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Alex Dumortier has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

WASHINGTON, DC — Microblogging platform Twitter (NYSE: TWTR.US) reported its first set of quarterly results as a public company after the market’s close to the market’s great displeasure — shares were down 18% at 6:32 p.m. ET.

Source: Twitter.

The direction — and intensity — of the market’s reaction to Twitter’s results is surprising, at first glance. After all, most of the company’s numbers look good, even great, relative to Wall Street’s expectations, as the following table demonstrates:

Sources: Thomson Reuters I/B/E/S, Twitter.

The only “miss” is with regard to EBITDA in the current quarter (the third line), where Twitter’s guidance range of $10 million to $16 million fails to meet analysts’ consensus estimate of $16.6 million, but that shouldn’t be all that upsetting, considering that the company’s guidance for full-year EBITDA is well above the consensus estimate. (EBITDA, or earnings before interest, taxes, depreciation and amortization is a proxy measure for cashflow.)

As such, the after-hours stock price reaction suggests that the market’s expectations were substantially above those of Wall Street analysts. Which brings me to the first number that is causing investors to decimate Twitter’s shares: 37. That was Twitter’s enterprise value-to-EBITDA multiple as of yesterday’s market close — roughly three times Facebook‘s! The growth expectations implied in that multiple are phenomenal, and as I speculated yesterday:

“Given the 150%-plus run-up in Twitter’s stock price from its IPO, I have a hard time seeing how this afternoon’s results will satisfy market expectations (although perhaps this is a failure of imagination on my part). Investors ought to be prepared for a share price decline, one that could be significant.”

Still, there has to be more to it than that — a catalyst that planted a genuine doubt in investors’ minds regarding whether Twitter can ultimately achieve the sort of growth that would justify its valuation. Which brings us to the second number that’s contributing to the decimation of Twitter’s stock: 9 million. That’s the total number of monthly active users the company added in the fourth quarter (with just 1 million in the U.S.), or 4% growth relative to the prior quarter. Twitter now has 241 million monthly active users, which is barely a fifth of Facebook’s total. (Twitter doesn’t do investors the courtesy of disclosing daily active users — which is the key segment of the user base.)

The slowdown in user growth raises the spectre that Twitter will remain a niche product instead of achieving widespread mainstream appeal. I think that concern is valid, as Twitter is less user-friendly and its utility less obvious than Facebook’s.

Twitter’s quarterly results provide investors with a new baseline with which to revisit the stock’s valuation. Yesterday’s correction looks more than warranted — and there could be more to come; it’s an object lesson in the perils of placing a high multiple on a business that shows promise, but which remains fundamentally immature.

The post The 2 Numbers Decimating Twitter Inc’s Shares appeared first on The Motley Fool UK.

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> Alex does not own shares in any of the companies mentioned.

WASHINGTON, DC — Microsoft (NASDAQ: MSFT.US) announced the appointment of insider Satya Nadella as its new CEO on Monday.

Microsoft CEO Satya Nadella. Source: Microsoft.

The rationale for going with an outsider to replace Steve Ballmer as Microsoft’s CEO was excellent. The software giant has only had two CEOs: co-founder Bill Gates and Ballmer, who was hired by Gates out of business school in 1980, five years after the company was founded.

Both men were not just steeped in Microsoft’s culture; they were its culture — one that was caught flat-footed by several critical shifts in the technology landscape that have sprung from the development of the Internet (search, Web-enabled applications, the shift from PCs to mobile devices, etc.).

However, it now appears clear that Microsoft, as an organization and a culture, was not ready to put an outsider at the helm. That is perhaps disappointing to some shareholders, but there are undeniable advantages associated with selecting a “company man.”

Microsoft is a sprawling organization with an aggressive corporate culture — not an easy environment for an outsider to come into, particularly when they are tasked with creating Microsoft 2.0 at a critical juncture (of course, one could argue that executives at this level are paid a lot of money to take on difficult tasks). For the right insider, knowing the ropes and being able to hit the ground running is extremely helpful.

Is Nadella the right insider? From what we know about him, his background and experience at Microsoft, the signs are encouraging. Armed with two degrees in engineering and a stint as head of R&D for Microsoft’s Online Services division, Nadella brings a technological savvy to the role that his predecessor lacked. Still, Nadella is a businessman: The Wall Street Journal reports that even as far back as his undergraduate days in India, Nadella told a classmate that “he wanted to get involved in marketing at a software company.”

Furthermore, before coming CEO, Nadella was head of the Cloud and Enterprise Group — a growth engine for Microsoft. In that role, he’s had the chance to observe the changing dynamics of the enterprise software market as companies increasingly move to hosted solutions — i.e., corporate users access software hosted on hardware that is maintained by an outside party.

Finally, I’m impressed that he effectively negotiated a new role for Bill Gates, that of technology advisor — Gates will no longer be chairman of the board. That position goes to lead independent director John Thomson. While Nadella paid tribute to Gates in his statements and his first company-wide email, this board shake-up is, in my view, essential to giving Nadella the latitude to make the necessary changes at Microsoft.

Speaking of his companywide email (you can read it here), pundits are poking fun at it for being long on lofty, big-picture ideas and buzzwords and short on specifics. This does not trouble me — was anyone really expecting a laundry list of specific actions? As far as its references to “making the world a better place,” a shot of idealism from the top isn’t harmful — nobody bats an eye when the leadership of Facebook or Google uses similar language.

In time, shareholders will need to judge Nadella on results; for now, however, they ought to give him the benefit of the doubt.

The post Why Satya Nadella Was The Best Choice For CEO Of Microsoft Corporation appeared first on The Motley Fool UK.

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> Alex does not own shares in any company mentioned. The Motley Fool owns shares in Google.

WASHINGTON, DC –Twitter (NYSE: TWTR.US) has priced its shares at $26 each, more than the $23-$25 range initially announced due to high demand, making it the biggest market debut for a technology firm since Facebook (NASDAQ: FB.US).

If you want any evidence that Facebook’s botched May 2012 initial public offering was a traumatic event, just look at the following headlines regarding the most anticipated IPO since the “Facebook fiasco”, which I culled from Yahoo! Finance’s homepage:

Challenges abound for Twitter heading into the IPO (Associated Press)

Success of Twitter’s Business Model Questioned Ahead of IPO (Breakout/Yahoo! Finance)

As Twitter IPO prices, poll says it’s not worth hype (CNBC.com)

Good News for Twitter IPO: Small Investors Are Skipping It (The Exchange/Yahoo! Finance)

But who, exactly, was traumatised? Investors or financial journalists? One headline tells a different story from those I just cited — one of enthusiasm, rather than scepticism:

Twitter boosts IPO range amid strong investor demand (Reuters)

Although they maintained the size of the offering at 70 million shares, Twitter and its underwriters first raised the previous $17 to $20 pricing range for the stock to $20 to $25, before today’s “$26” news. If the underwriters exercise the overallotment option for an additional 10 million shares, Twitter will end up raising more than $2 billion at the top end of that range.

The truth is that this is a fantastic time for Twitter to go public: the stock market has had a great run this year and growth-stock IPOs have been making eye-popping debuts (in the US, witness the shares of sandwich chain Potbelly, which more than doubled on their first day of trading, and we all know the score with Royal Mail by now). Finally, the most highly visible social networking stocks — Twitter’s peer group — have outpaced the market, as the following performance graph of Facebook and LinkedIn illustrates:

FB data by YCharts

With those precedents in mind, should investors ignore the sceptical articles regarding Twitter and plow into the stock? My answer: no.

Where Facebook and LinkedIn are solidly profitable, Twitter isn’t. In that regard, it’s closer to local-business review site Yelp, which has yet to turn a quarterly profit (although that hasn’t stopped the stock from gaining 241% this year.) Twitter is a fascinating platform, and it has already made a massive impact on business and popular culture, but as a business model, it’s still finding its feet. Several ad buyers at major advertising firms recently told the Financial Times that the funds they allocate to Twitter come out of their “experimental” budgets.

I think the odds are excellent that Twitter’s stock will post muscular gains once the shares begin trading, but whether it will prove an excellent long-term investment looks much more uncertain. Investors who are interested in buying the shares should first ask themselves what they expect to achieve, over what timeframe… and how much they are prepared to lose in an adverse scenario.

The post What’s Wrong With Twitter Inc’s IPO? appeared first on The Motley Fool UK.

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> Alex has no position in any stocks mentioned