WASHINGTON, March 13, 2017 – I wrote a response to a Quora query the other day opining on the relative merits of buying and/or owning shares in Snap, Inc., the parent company of Snapchat.
Snap Inc.’s new IPO shares (symbol: SNAP) went public a little over a week ago, and many investors who aren’t in these shares already are anguishing over whether they should buy some SNAP shares now that they’re trading on the New York Stock Exchange (NYSE)—even though the shares have been steadily sinking since the initial post-IPO buying frenzy that bid these shares up.
Meanwhile, existing investors who still hold the stock are wondering if—or how fast—SNAP shares might fall below their initial offering price of $17 per share.
Given the wide and continuing interest in what I personally and professionally regard as the rather dubious shares of a rather dubious company, I figured that today—with the stock down another 4.5 percent from Friday’s close—it might be a good idea to provide an update.
My other reason for opining today: Given that I obtained 100 shares of SNAP in the actual IPO (which I didn’t expect to get allocated to me), I thought it might be helpful to share the comments I made in response to that Quora question with readers of this column. What appears below was somewhat hastily written. But I’m reproducing what I wrote verbatim, save for a light, clarifying edit or two enclosed in square brackets:
“I took a chance on picking up Snapchat shares (symbol: SNAP) just for the heck of it. From an earnings standpoint, the stock is inherently worthless, i.e.,
“The company (Snap, Inc.) generates zero profits and will not be profitable likely for years. The problem is, that information alone is enough to kill the stocks of normal companies. But in tech, investors and speculators are always looking for the likelihood of future growth and eventual profits. A good example is Amazon (AMZN), which was clearly unprofitable for years. However, it kept growing market share and people kept bidding the stock up anyway. The company is profitable right now, but is still way ahead of where it should be, price wise.
“I picked up 100 shares I didn’t think I’d get [allocated by my brokerage house]—often a bad sign, as the shares in hot issues usually go to the rich guys first—and certainly enjoyed the ride for the first two days. But SNAP started coming back down to earth, big time, this past Monday [March 6, 2017], and the miserable action continued pretty much all week.
“I viewed some heavy selling [in this issue] as [being] inevitable after the new shares opened for trading. Since SNAP [currently] makes zero profits, from a strict accounting standpoint, zero is what the stock is worth. However, what a stock is REALLY worth is whatever people will pay for it. It’s clear that after the IPO opened for trading on the open market, some funds and quite a few inexperienced or amateur investors—as [for example] millennials that love the company and bought 5, 10, 15 shares because they thought they’d make a fortune—were the ones responsible for bidding the stock up to [the upper 20s].
“So inevitably, sellers came in hard on Monday, and also a bunch of short sellers (who dump borrowed stock thinking it will go down and then buy the shares back at a much lower price, pocketing the difference). The selling remains hard on this puppy and I wouldn’t be surprised to see the shares drop down below $17 before the month is over.
“According to my discount [brokerage’s] rules, I have to hold IPO shares for at least 30 days until I can get rid of them, so whatever happens, happens. It’s a gamble. Most IPO investors, however, if they trade at a full service [brokerage] house, will flip these shares the same day they get them if the initial [upward price] pop is big enough. When SNAP hit, say, $26 per share [and change] on the second day of public trading, if you had 100 shares you got at the IPO price of $17, that’s $1,000 profit, far better (and far faster) then you’ll ever make money in Vegas. That’s why a lot of holders started selling. You would, too.
“But amateurs and got-to-haves are now left holding the bag, at least for now. That’s actually what happened to Facebook, as some might recall. But Facebook, which I actually dislike, has been smart and done well and now commands a price far above that original IPO. So you win some and you lose some.
“I hope I win at least a little with SNAP. I do book wins fairly often. But you can also get your head handed to you with investments like this. So, unless you have $$$ that you can afford to lose, be cautious with IPOs. And if you don’t get shares at the offering price, for God’s sake don’t chase the shares, at least for the first few days. It’s a sure recipe for getting killed by Mr. Market.”
I should add that as an experiment for my readers, I did chase Facebook (FB) shares after the IPO since I didn’t get any shares on the IPO allocation. I just wanted to see what would happen and share it with my readers. What I shared was a nice, fat loss. Facebook IPO shares we’re priced grossly above what they were worth, as the underwriters flogged the shares before the issue with positive PR, creating so much demand that the company issued even more IPO shares when it went public.
Those who chased this stock rode it down over 20 points from the top and either took a big loss when they got out or sat there holding the bag for a considerable amount of time, investing in that elusive element known as “Hopium.” I bailed fairly quickly when I saw what was going on, so my loss was minimal.
Over time, true, Facebook has been a mighty hot stock. But for me, there’s also the “time value” of money, which has taught me that getting out when the risk factors turn against you is the best way to go, at least in the current market.
On the other hand, I did manage to get 100 shares of Twitter (TWTR) on the IPO. These shares also took off on the upside and actually kept going up after my 30-day holding period, so I rode them for a while until the rally looked like it was running out of fuel. As I recall, I finally sold these shares for at least a 30 percent profit. If an investor is honest, he’ll tell you he doesn’t book 30 percent profits on a regular basis. I sure don’t. But it’s swell when you do.
In point of contrast, however, Facebook shares, which were almost legendarily miserable after the shares began to trade on the open market, is currently one of the tech powerhouses you can invest in. And I lost money chasing it.
On the other hand, after making a handsome profit on the Twitter IPO, I’ve watched that company as it’s taken a one-way trip to oblivion. You never know.
But bottom line: Don’t buy IPO shares, or any stock for that matter, just because you “love the product.” Many people used to love shopping at Montgomery Ward’s not so long ago. Oh, you were born after, say, 1985 and never heard of Montgomery Ward’s? That’s what I’m talking about.*
Aging Boomers like this writer can be perceived as being cranky, tedious and condescending. But before I’m 6 ft. under, I feel obligated to share my successes and failures with new and potential investors. You gradually learn the rules of the road in the investment arena, often by trial and error. A lot of this is never taught to college students in business degree programs. But if you don’t know how things really work, there are plenty of folks out there who are willing and fully capable of taking you and your hard-earned savings to the cleaners. Legally.
So pay attention here. IPOs can OFTEN be both fun and profitable. But only if you occasionally get clobbered by an IPO here and there. If you do your research, and stay abreast of the market environment in which the IPO is given birth, you will, over time, get more hits than misses and your portfolio will prosper accordingly. But if you go after IPO shares whose products you “love” or whose image is “cool,” don’t be surprised if the balance in your brokerage account quickly shrivels to nothingness.
*Explanation, for those still in the blossom of youth: Ward’s was once a major competitor of Sears. Haven’t heard of Sears, either? Well, the holding company, which also owns K-Mart (SHLD) and is still well known for its Kenmore appliances, Craftsman tools and Die Hard batteries, is currently treading water and closing stores. The post-millennial generation may never hear of Sears, either at the rate that company’s retail fate is heading.