Oh Snap: We Tried to Warn Them
We tried to warn them.
But the hype was just too hot to ignore.
On February 9, 2017, we noted that the Snap IPO “could be more trouble than it’s worth” based on overvaluation concerns alone. It wasn’t a safe bet. It never was. Any one that did any research knew that. At 60 times earnings, it would be one of the hottest IPOs to hit the market. Just to justify that valuation, it would need to grow its bottom line quick.
There was no way that was likely to happen.
According to reports at the time, the company managed to lose $514 million last year on revenue of $404 million. It lost another $169 million in the fourth quarter on $166 million in sales, too. Growth in users seemed to be slowing thanks in part to explosive competition. According to the S-1, its annual user growth is now below 23% - bad news.
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User growth dropped from 15% daily active users in the first two quarters of 2016 to 7% by the last two quarters of the year. The other risk here is that Snap could become another Twitter-like disappointment on the market.
Traders didn’t care, though. Instead, when Snap Inc. first hit the market in March 2017, traders raced to buy shares, sending it as high as $29.44 a share. The owners, the underwriters made a fortune from it. Traders – thinking they were going to make a fortune – watched as the stock ticked lower and lower, cursing the stock.
Sadly, this same scenario has played out dozens of times with hyped social media IPOs.
Yet traders never learn. They get sucked into the hype.
The only people that usually get rich quick from such IPOs are the big guys.
However, as we also pointed out at the time, the only real way to make money from the excitement of such an IPO was by buying into the Global X Social Media ETF (SOCL), which provides traders access to social media stocks safely.
That’s what we pointed out on February 9, 2017, too.
At the time, the SOCL ETF traded around $24. It would hit a high of $29.25. That trade idea was profitable. Once the SNAP IPO hit market, it hit a high of $29.44, trapping foolish traders, before plunging to a recent low of $17.14 s share.
It’s likely to flounder and die, as it struggles.
Snap doesn’t appear as hot as it was prior to IPO. In fact, according to mobile app statistics, downloads of SNAP are down 22% in two months. If that’s already happening, why would any advertiser be interested in doing business with them?
Before you ever trade another IPO, do a bit of due diligence.
With SNAP, it could have saved you a lot of time, money and effort.
When you are looking for investing opportunities, a curious "X" Pattern often reveals itself before a stock is about to breakout, even before news events, such as earnings reports. A similar "X" Pattern reveals itself when the run-up is exhausted, signaling that it's time to exit the trade. Learn more about the "X" Pattern here.