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The Snapchat (SNAP) IPO Will Be a Bust, But You Should Buy It Anyway

SNAP stock may still have a "pop" on day one

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Snapchat’s (NYSE:SNAP) IPO has mainstream media sounding alarm bells. Fortune wrote that “Snapchat Likely the Most Expensive Big Tech IPO Ever;” the Wall Street Journal said a “shadow looms over” its IPO. These opinions may all be true, but investors should buy SNAP anyway. However, there is one catch to the Snap Inc buying strategy.

The Snapchat (SNAP) IPO Will Be a Bust, But You Should Buy It Anyway
Source: Shutterstock

In return for $3 billion, Snapchat refuses to give shareholders any voting power. This is a red flag for investors. If the company’s business invariably heads south, stockholders have no recourse.

SNAP Gives No Rights to Shareholders

Despite the lack of value in SNAP shares, speculators may still make a quick buck trading the stock. Just look at Twitter Inc (NYSE:TWTR) or Facebook Inc (NASDAQ:FB). These stocks still rose after going public — the difference is that Twitter’s near doubling was short-lived, while Facebook’s shares continued climbing higher:

TWTR Chart

Long-Term Risks With Snap Inc

But Snapchat’s biggest risk is Facebook and its subsidiary, Instagram. When FB launched Facebook Stories above the news feed, it took away a reason for millennials to leave the site and use SNAP. Similarly, Instagram Stories usage grew to 150 million daily active users in just five months. The stickiness of Facebook could erode Snapchat’s business value, putting its approximate $25 billion IPO market capitalization in question.

SNAP’s management hopes momentum investors will justify the valuation with the incredible user growth. The site had 46 million average daily active users. By Q2 2016, DAU reached 143 million. That growth is slowing. In Q3 2016, DAU growth for Snap Inc slowed to 62% year-over-year and to 48% by Q4.

Twitter’s user growth pales in comparison to that of SNAP. Nobody even talked about Twitter’s growth when it first IPO’d. On Feb. 9, the company reported first-quarter DAU growth of just 11% year-over-year. MAU grew just 4% YoY. Twitter forecasts advertising revenue lagging audience growth in 2017. Still, SNAP costs 60 times revenue, while Twitter costs 5 times sales.

In fact, Snapchat’s valuations will make Facebook stock look cheap. Just one bad quarterly earnings report from SNAP will send the stock down. Fundamentally, FB’s use of Snapchat functions on its own products will only win back the users it lost, which makes buying SNAP sound like a gamble. It is a potentially profitable trade, though, provided speculators set up a stop-loss. Beyond the first few days or weeks afterward, it makes little sense to hold Snapchat stock.

Another big red flag for Snap Inc is its lack of profitability. In its filing, the company disclosed it may never make a profit. It wrote:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

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