Why You Should Avoid the Snapchat IPO

Snapchat, the app that allows you to share photos and videos that disappear after 10 seconds, priced its much-anticipated IPO at $17 a share on Thursday, above its expected range of $14 to $16. And while it may be tempting to get in early on the Snapchat IPO given all the noise surrounding it, I’d steer well clear of SNAP right now.

Two Lessons for the Snapchat IPO: Facebook and Twitter

For reasons why, look no further than how things went for fellow social media giants Twitter (TWTR) and even Facebook (FB) after their ballyhooed IPOs. It may be hard to remember now that it’s one of the market’s great growth stocks, but Facebook famously tanked in its first year as a public company. Part of it was due to a technical glitch that halted first-day trading on the Nasdaq, setting a rather inauspicious tone for FB stock. Weak mobile sales also played a role. But the main reason Facebook stock tanked was that it was overvalued from the get-go, pushed to an unreasonably high IPO price by almost unprecedented hype.

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It took well over a year for FB to recover—the stock tumbled more than 50% in its first four months, and it didn’t get back to its $38 IPO price for 15 months.

Twitter’s problems run much deeper. After a huge pop in its first two months of trading, TWTR has spent the ensuing two years falling flat on its face. The stock is down 64% since its November 2013 IPO, and hasn’t traded at even half its December 2015 peak in more than 18 months.

Like Facebook, Twitter was pushed to an unreasonable valuation right out of the gates thanks to a Wall Street hype machine that was in overdrive. Unlike Facebook, Twitter has never made a profit, which is why TWTR stock has never recovered. I fear Snapchat is doomed to a similar fate.

Many of the numbers from Snap Inc.’s (the parent company of Snapchat) IPO filing were impressive: namely, $404.4 million in 2016 sales, up from a mere $58.6 million in 2015, and 158 million average daily active users, up nearly 50% from the previous year. There was just one major catch: the company is nowhere near profitable, and its losses are deepening. Last year, Snapchat lost $514 million, up from $373 million in 2015. Twitter’s losses were even greater ($645 million) the year it came public, but its revenues ($665 million) were much better than Snapchat’s.

Having lost more than half a billion dollars in 2016, it could take Snapchat years to get in the black. Just ask Twitter. But that didn’t stop early backers of the Snapchat IPO from pumping up the valuation to irrational levels. SNAP started with a market value of $23.6 billion—just shy of Twitter’s $25 billion market cap upon its debut.

Facebook had been around for nearly a decade when Mark Zuckerberg finally took it public. It raked in $3.7 billion in sales and $1 billion in net income the year before its market debut. Facebook was a mature social media company, and even it struggled mightily after its IPO.

Twitter, a far less mature (though universally recognized) company, got an early hype-fueled surge in its first couple months of trading, but has been spiraling downward in the three years since.

Snapchat is even less mature; it’s been around for five years, it only started to monetize by selling ads last year, even its founder (Evan Spiegel) is just 26 years old! But it’s a big name that most people know, with plenty of growth potential, and that makes it intoxicating for early backers and investors.

SNAP Looks Like the Next TWTR

Don’t be fooled by that same allure. Avoid the Snapchat IPO at all costs, even if it goes on a nice early run after its debut much like Twitter. If SNAP shows some encouraging technical signs after a few months of trading, and the company reports more strong sales growth and smaller losses in the next quarter or two, then Snapchat might be worth the investment. But give the stock some time to breathe before you go diving into the pool with a blindfold.

If you do invest in the Snapchat IPO, you could wind up with the next TWTR.

Chris Preston

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