SquareSpace (SQSP  ) fell about 15% on its first day of trading. Shares opened at $48 which was below its pre-IPO trading price of $50 and closed under $44. In the following trading days, shares caught a bid and are now at $52.63 as of the close on May 28 which equates to a valuation of $7 billion.

SquareSpace's rocky debut reflects that the environment has gotten less favorable for IPOs. In March, the company was able to raise money at a $10 billion valuation which implied a share price of $68.42. Another factor is that the company went public through a direct listing which often means that there is more selling pressure in the initial weeks of trading as there is limited institutional support and less stringent restrictions on insider selling.

Company Profile

SquareSpace was founded in 2003 and is known as an all-in-one website builder and e-commerce platform. It has more than 1,200 employees and locations across the world. The website offers a variety of free website-building tools to customers but then offers more premium features and services such as website creation, blogs, email marketing, ecommerce tools, and search engine optimization.

The closest publicly traded comps for SquareSpace are Wix (WIX  ) and GoDaddy (GDDY  ) with each having $14.6 billion and $13.7 billion, respectively. Both stocks performed quite well in 2020 on the acceleration in digital adoption, while they have struggled in 2021 along with many tech stocks.

In 2020, Squarespace posted $621 million in revenue, a 28% increase in revenue which was an acceleration from 24% in 2019. 94% of its revenue is subscription-based with nearly 70% of it being annual subscriptions. In 2020, it added about 700,000 new subscriptions. About 70% of revenue came from the U.S.

Stock Price Outlook

SquareSpace's stock is compelling as it offers investors exposure to several growth areas such ecommerce, online marketing, and the creator economy. Additionally, SquareSpace's customers use it to promote their businesses so once people are on its platform, they are unlikely to leave.

Further, SquareSpace has been moving past physical ecommerce in helping service providers set up their businesses, market, and book clients through SquareSpace which could be an area of growth especially as the economy reopens.

However, at its current valuation, the stock is overpriced. Yet, growth is not certain especially with so many competitors. In the near term, the company will have to keep spending heavily to keep adding new users which will limit profits. Additionally, direct listings have a tendency to remain range-bound for many months as new supply is digested.