Earlier this month, Snapchat parent company, Snap Inc., filed an initial public offering (IPO). This will be the first time outside investors can purchase stock in the company. Snap Inc.’s IPO is expected to be $3 billion, placing the overall value of the company at over $25 billion – bigger than Facebook when it did an IPO in 2012!
Online financial media outlets like Fortune, MarketWatch, and Yahoo Finance were undoubtedly excited, filling up the home page of their websites with stories about Snap Inc. And this is only the beginning.
A typical IPO is announced long before the stock is actually listed on the stock exchange. Then, the company’s executives go on a “road show” to convince investors to take part in the IPO. Media coverage only increases the hype.
However, before one succumbs to the financial hysteria, it’s important to consider the following:
Gobs of media attention
The financial media isn’t excited for the financial prospects of Snap, Inc. In fact, they couldn’t care less. What they are excited about is that the IPO-frenzy will lead to an increase in “hits” to their websites. The increase in viewership leads to additional ad revenue.
In most IPOs, the biggest winners are the company founders and investors who got in on the ground floor. Those who buy into the IPO don’t typically do as well. And, investors that aren’t able to participate in the IPO but then buy the stock once it hits the market generally do even worse. Take Facebook, for example. In May 2012, the stock opened at around $38 following the IPO. By mid-August, it was down to $18. While Facebook eventually skyrocketed to above $134 (no doubt an amazing return), it took over four years to do so. How many investors who bought at $38 and rode the stock down to $18 had the patience to stick it out? Not many.
That isn’t to say that patience is all one needs to be successful when it comes to an IPO. Take Twitter’s IPO. Twitter’s initial stock price was over $40 in late November 2015. It shot up to $60 by the end of the year but spent the vast majority of 2016 under $20 and now sits around $15. Those IPO investors that had patience are regretting it right now. Bottom line – there’s no sure thing when it comes to an IPO.
The company itself
Lastly, consider Snap Inc. as a company. In 2016 they earned over $400 million. That’s a lot of money! But they also spent over $900 million to make that revenue. That’s even more money!
Now, technology companies often start out unprofitable and can remain so for a while. Eventually, they might turn a profit like Facebook. Sometimes, they don’t.
But there’s no way of knowing that will happen in advance. IPO investors are simply gambling on expectations. And not even the smartest of Wall Street minds can predict what will happen with certainty.
Ultimately, if one participates in an IPO or invests in a newly-public company, they must realize they’re essentially buying a lottery ticket rather than a solid investment. Snap Inc.’s IPO is more like a fun day at the track. No one knows how the bet is going to turn out, but it will sure be exciting to watch!