The Trend

Two Essential Questions all IPO Traders Should Ask

Whenever a new IPO is about to hit the market, you’ll often hear that it’s the “biggest, most exciting IPO of the year.”

It could produce millions for smart investors.

But that’s not always the case.  Alphabet Inc. (GOOG) for example sank from $600 to $500 in its first days.  LinkedIn (LNKD) fell from $122 to $60 in two months.  Groupon (GRPN) plummeted from $31 to $15. 

RenRen (RENN), the Facebook of China slumped from $22 to less than $5.  And when Facebook (FB) IPO’d in 2012, it ran as high as $45 before falling to less than $20.

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In each case, it didn’t matter how hot the story was, once the PR-blitz wore off, down came the stock, and down came the value of IPO-trader accounts.

Point being – too many traders are getting caught up in this wave of euphoria, believing they’ve found the Holy Grail of stocks at IPO.  They actually believe they can make millions from an IPO out of the gate.  But as we can tell you from experience, the only people that make the most money from an IPO are the underwriters, the Big Boys of Wall Street.

The second issue among retail investors is that not many do their homework.  They’re just buying on euphoria.  That’s it.  But that’s not smart.  We all know that.  Many don’t bother to ask two important questions prior to buying.

  1. Is the company making money?
  2. Is the company likely to make money in the near future?

If the answer is no to both, you have no business buying the stock.

Let’s start with the fact that SNAP never communicated how it will “grow up” as a potential fad among today’s teenagers and millennial kids.  That’s its core audience.  Older users don’t seem to have much of an interest in learning it at all. 

How can it make money as its core audience grows up, and fades as another fad?

Also, the company clearly told us it was losing money and users.

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. 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. 

Worse, losses have been mounting in recent quarters, as it ramps up spending to bring in more users.  It even said it, “may never achieve or maintain profitability.”

So, what’s the best way to successfully trade an IPO out of the gate?

Don’t buy it at all.  Wait for the hysteria and PR-blitz to wear off.  Once the stock has pulled back, begin to do your homework.  Is the company making money?  Does it have a plan to build its customer base?  Can it make money going forward?

And again if the answer is no, move on.  There's no sense in getting burned.