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Snapchat IPO Remains a Cautionary Tale

The much-anticipated Snapchat IPO seems like a distant memory, as SNAP stock just sank to new lows. It’s Exhibit A as to why you should avoid IPOs.


IPO letter on each block over gold coins stacks with newspaper and glasses

Photographer:Rudyanto Wijaya

It’s been four and a half months since Snap, Inc. (SNAP), parent company of the popular photo-sharing app Snapchat, came public amid the kind of hype typically reserved for well-known social media companies. At the time, I wrote why you shouldn’t touch the Snapchat IPO with a 10-foot pole. I hope you heeded my advice, because SNAP stock just hit new lows.

On March 2, SNAP closed its first day of public trading at 24. Earlier this week, it dipped below 15, and is down more than 11% in the last week. Really, it’s a continuation of the downward spiral that began two days after the ballyhooed Snapchat IPO. Just look at the chart.

This chart makes you wonder why the Snapchat IPO had so much hype in the first place.

Even if you were brave enough to buy SNAP on its first day of trading, you’ve lost money. Why has the social media stock been such a disaster? Simple: it’s not profitable and it’s overvalued. Both those things were true at the time of the Snapchat IPO, but they were made worse when the company reported a $2.2 billion loss (or $2.31 per share) in the first quarter. Considering SNAP lost $887 million in 2015 and 2016 combined, losing more than twice that in its first quarter after coming public wasn’t exactly encouraging.

As you see from the huge early May gap down, investors punished SNAP severely for its disappointing Q1 results. Second-quarter results aren’t due out until August 10. Fortunately, analysts are anticipating a far more modest EPS drop-off (-$0.14) and improved sales from the first quarter. But I’m not sure that will be enough to trigger a major about-face in the stock.


SNAP’s early growing pains are extreme, but fairly typical of social media IPOs. Even Facebook (FB) struggled mightily in its first year of trading. And 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 stock market debut. Facebook was a mature social media company, but that didn’t stop FB stock from losing more than half its value in its first three months of trading.

Twitter (TWTR), a far less mature (though universally recognized) social media 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 just over 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 made it irresistible for early backers and investors.

At Cabot, we never recommend investing in IPOs - even the best IPOs. You just never know how the market is going to respond to a new company, no matter how well-liked it is. That’s why Tim Lutts, our president and chief investment strategist, recommends taking the four-month approach to all new public companies—that is, wait four months to see what the chart looks like before investing.

It’s been more than four months since the Snapchat IPO, and SNAP stock doesn’t look any better today than it did then, with more profit losses expected both this year and next. With a chart like this, you’re probably better off giving SNAP another four months (at least!) before seriously considering adding it to your portfolio.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .