The Trend

Snapchat IPO: The Easiest Way to Trade It

An 800 lb. social networking gorilla is about to enter the room.

But it may be more trouble than it’s worth. Sometime in 2017, Snapchat is hoping to IPO with a valuation of $40 billion. While exciting, a valuation of that size doesn’t work, especially for a company only expected to generate $300 million in 2016, up from $50 million in 2015. Even if you believe the company will see north of $1 billion this year, it’s not enough to support a multiple of 40 times earnings.

Granted, the site is stomping its competition with 27% daily user growth rates, but again current numbers don’t support it. Instead, smart investors are taking an easier route when it comes to trading Snapchat without ever having to buy a single share. Because, as we’ve seen with other richly priced IPOs, things don’t always go as planned.

Just look at LinkedIn. On its first day, traders watched their investments crash and burn: Groupon (NASDAQ: GRPN) got crushed just weeks after going public. RenRen (NASDAQ: RENN), "the Facebook of China," fell 75%. Even Facebook (FB) was a mess out of the gate. All were overvalued, wildly popular and oversubscribed at IPO, too, much like Snapchat could be.

Instead, smart investors will typically flock to the U.S. IPOX-100 Index (FPX), which tracks the 100 largest, best-performing and most liquid IPOs. The FPX measures the performance of IPOs during their first 100 days. We've already seen the FPX race from $18 to $26 on the heels of Mastercard (MA) and First Solar. Close to a year after Twitter (TWTR) issued its IPO, FPX ran from $42 to $49. A year after Facebook the FPX ran from $27.50 to $35.

But it’s not the only way to trade the excitement surrounding another social media IPO. In fact, for any investor looking for easy exposure to social media companies, like Facebook and Snapchat, the Global X Social Media Index ETF (SOCL) is another interesting option.

SOCL has pulled back in recent weeks offer what we consider an opportunity of a lifetime. But consider this. “Already over a decade old, the social media industry has revolutionized how the world communicates, consumes news and media, and shares ideas. Despite signs of a maturing industry – namely slowing user growth and increasing mergers and acquisitions – social media remains one of the highest growth potential areas in the Technology sector given extensive opportunities to monetize users and license data,” according to Global X.

In short, as anticipatory momentum builds ahead of what appears to be another overvalued stock the better choices are the SOCL and FPX ETFs. Both have a tendency to continue running, despite potential disasters.