Charles Payne on Snap Inc: Be Prepared to Lose

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There has been a lot of buzz around Snap Inc (NYSE:SNAP), more commonly known as Snapchat, since SNAP stock went public last Thursday and traded more than its 200,000 share float in just its first day.

Charles Payne on Snap Inc: Be Prepared to Lose

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The offering was priced at $17, but SNAP stock opened at $24 and closed at $24.48. On Friday it continued higher, topping out at $29.44 before turning back last week to hit a low of $20.64 on Tuesday.

A lot of folks who bought the first two days are looking at losses, and shareholders who got in at the IPO price are hopeful that amazing debut doesn’t vanish into thin air. It’s too early to see where the company and stock might be a year from now, but there are cautionary tales from past hot tech IPOs worth visiting.

Where SNAP Stock May Be Headed

Theglobe.com, inc. (OTCMKTS:TGLO) saw a couple of college undergrads take the concept of chat rooms public, and that set the world on fire. On Nov. 13, 1998, The Globe’s initial price was offered at $9. Once it began trading it rallied all the way to $97 before settling at $63 for a record one-day gain of 606%.

In many ways, this took the tech IPO market into overdrive and got a number of Americans thinking they would “play” the market and retire at 40. One of the founders was known for hitting the town in leather pants with his model girlfriend. It’s not known what happened to the pants or the girl, as the stock eventually worked its way to penny stock territory.

If the Globe took the tech bubble into overdrive, it was World Online that erected its brick wall. The Dutch tech company was billed as the America Online for Europe and Africa. It was successful with growing subscribers, but there was the issue of profits. However, that’s not where the deathblow came from.

There was one hell of a party that day on March 17, 2000, as the stock was oversubscribed 21 times. When trading began, the shares skyrocketed. By the closing bell, they were unchanged at 43 euros, but still sported a 12 billion euro valuation. In the midst of the party, someone asked founder Nina Brink what she thought of the action and what she was going to do with her newfound wealth. That’s when she admitted to having already sold her entire 10% stake in a private transaction for only 6 euros per share.

The stock went into freefall. A week later, the S&P 500 hit an all-time high and began to implode. I’d say it was a sobering wake-up call — everyone had been suckered and the game was over.

I’m not saying SNAP is either theglobe.com or World Online, but now all the unicorns are going to come public, and some will be dogs looking for suckers to finish the “Greater Fool Theory,” so be careful.

What really bothers me is the fact that the millennials who would never think of owning General Mills, Inc. (NYSE:GIS) or any other boring non-tech name may pile into a bunch of IPOs of companies with no earnings. Ironically, maybe buying them all is the only way to get the winner, but most people are going to pick a couple and I hope they go on more than just the cool factor.

So the question comes down to this: Should you avoid these unicorn-type IPOs? I’ve talked about this before in my Smart Talk newsletter, and the answer is both yes and no.

Bottom Line on SNAP Stock

I do think the risks right now for these unicorns are too high for the average investor to buy them on their IPO day. Be careful, do your homework and make sure that you understand the risks you’re undertaking. And if it’s a stock you like, you may want to wait it out for a few weeks or months to let the hype fade.

Also, if you’re going to make this kind of investment — buying into the most-hyped IPOs — make sure you’re only investing money that you can afford to be down on, at least at first. I’m not saying you’d lose that money, but you may not see profits right away.

Think of it this way: If you opened a pizzeria in New York City and had to sell it two days later, you’d most likely only get half of the money you put into it. That’s why it also helps to be in it for the long haul.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/03/charles-payne-on-snap-inc/.

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