Tuesday, March 7, 2017

The SNAP IPO - To Buy or Not To Buy

Every year there's a couple IPO's people clamor to get on board with. They are hyped up by the media, it seems everyone uses their goods and the company is the new wave for the future. Today we are going to focus on SNAP Inc's(SNAP), or more commonly known as Snapchat.

Below are all phrases that will either pass through your head, or hear others around you saying:

"This IPO will rock!"
"Sounds great"
"Sign me up"
"It's such a great investment"
"Seems like a can't lose"

Problem is none of these phrases dig deep into the financial well-being of the company. Most people, possibly including yourself, don't know how to perform an in-depth financial analysis of a company.

That poses a major problem. You have no idea yet if the company is really "successful".  By that I mean are they even making money consistently? Many, but not all, IPO's are filed by companies that are still losing money. Yep that's right. They LOSE money every year.  Business is a tough business.

Now of course it's the goal of every business to eventually  make money, and that's the promise you are basically buying in most IPO's.  So let's take a look at SNAP Inc's prospectus filed with SEC.  This is a valuable starting source of information for all newly traded entities.  In every IPO the prospectus will give you a lot of info including financials, ownership structure, risk factors, and amount of stock being sold to name a few.

For example a quick review of the prospectus will tell you the company has never made a profit yet, and lost $514 million last year. Not good. You'll also find the company has nearly $1 billion in cash, and only $203 million in liabilities. That's actually really good. You'll also find the company is heavily reliant on it's North American users for revenue as our continent accounted for 87.8% of company revenues in Q4'16.

Now I won't get into every detail since I can go on forever.  What we are trying to discern here is if this is a suitable company for you to buy, and we don't need to dig deep into the prospectus for that answer.

For most people the answer is absolutely not.  IPO's are risky.  If you aren't a professional investor then you should stay away. Of course the stock can shoot up 400% and you'll feel like you missed out. But it can also crash to zero leaving with nothing, and you'll be missing out on all your cash. If you have a reputable advisor(such as MAD Consulting) then I'd set up an appointment to see if this is something that fits into your portfolio for either a long term hold, short term hold, or a trade. You must set a clear cut goal from the outset.  Otherwise if you are managing your own funds and can't stare at the computer all day with trade data in front of you it's just not a good choice.

Here is why.  A professional trader and investor will be in front of the screen all day watching the action.  They will be either long or short the stock, and be able to move on a seconds notice.  They will also be well capitalized. If you think your $5k account is any match for them good luck.  Most professionals start with a minimum of $30-$50k, and I know some companies that start traders out with an account of $250k+.  Oh and did I mention these are the small professionals?  The big guns have accounts well into the millions, and technology your online discount broker can't even fathom matching.

Now should you buy or should you short SNAP is the million dollar question. That depends on your viewpoint.  I don't think the company right now is worth the $30 billion it traded at last week, and the market so far agrees today as the shares currently have the company valued at $22 billion.  That does not mean the company will never be worth $30 billion or more. Facebook's(FB) IPO had it valued around $80 billion, and their IPO flopped with the company trading at a measly value of $45 billion shortly thereafter.  Facebook(FB) is now worth a cool $400 billion with 1 in 6 people using their platform

So the answer ultimately lies in what you think the company is worth today, and what you think it will be worth in the future.  There will be plenty of people that think it's worth more, and plenty that think it's worth less.  That's what makes the market. What side will you choose to be on?

You can contact MAD Consulting here. Don't forget we offer special discounts for Police, Fire/Rescue Personnel, and Teachers off MAD Consultings $30/mth Unlimited Plan.

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