This Thursday, the Snap Inc (NYSE:SNAP) IPO is expected to hit the markets. The current price range on the deal is $14 to $16, which means that the company could raise over $3 billion. It seems like a good bet there will be a nice move on the upside, but you will probably not get any shares at offering price.
Rather, you’ll have to take your chances in the aftermarket, which can be dicey. So how should you approach SNAP? Ultimately, it depends on your time frame.
Let’s take a look at some potential strategies:
Snapchat IPO: The Long-Term Trade
A lot of investors are wondering: Will this be similar to the opening of Facebook Inc (NASDAQ:FB) or Twitter Inc (NYSE:TWTR)?
After all, the performances are a stark contrast. FB has logged a gain of 254% since its debut while TWTR has lost a grueling 62%.
Unfortunately, for the Snapchat IPO, I think there is a better chance that the returns will look more like the latter. Why? Snap Inc looks more like a niche operator. The 18-to-34 year-old category is certainly a valuable niche, as many advertisers have a tough time reaching this demographic, but the market opportunity may prove to be relatively small.
According to Pivotal analyst Brian Wieser, the revenues from youth-oriented cable channels like MTV, VH1, Comedy Central and Adult Swim come to roughly $3 billion per year.
Besides, if SNAP is unable to break out of its niche, the company will certainly be challenged in keeping up the growth of its user base. Actually, there has already been a deceleration. It went from 21 million net adds in Q2 of last year to only 5 million by Q4.
But there are some other issues that could be a problem for long-term holders of Snapchat stock:
- The net losses remain significant, coming to $514.6 million in 2016. This compares to revenues of $404.5 million.
- The competition continues to get tougher. To this end, FB’s Instagram has been essentially matching many of SNAP’s core features (and this may help explain the deceleration in the user growth). According to InvestorPlace contributor Chris Lau: “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.”
- There are signs that Spectacles, which are glasses that allow you to take photos and videos, may be losing much of their appeal. According to the Wall Street Journal, SNAP recently closed a pop-up store in New York City where “there were often more employees than shoppers.”
- SNAP has a contingent liability of $2 billion. This is what the company must pay — until 2022 — to Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) for cloud services.
- Public shareholders will not have the right to vote. This will mean it will be nearly impossible for an activist investor to get any traction if there are problems with SNAP.
- There is no headquarters, which could make it tough for allowing collaboration.
Snapchat IPO: The Short-Term Play
While the risk factors mentioned above are downright scary, they probably won’t amount to much during the next few months. If anything, the Snapchat IPO is likely to be a great vehicle for traders.
One key reason for this is technical: The amount of shares on the market will be fairly small. This means it will not take much buying power to move Snapchat stock.
Interestingly enough, it looks like the company has been taking steps to keep the float tight. To this end, SNAP is requiring some investors to not sell 50 million of the 200 million shares that will be offered.
Of course, there will be some other factors that will help drive the momentum. Keep in mind that SNAP likely has various deals lined up, which should gin up buzz over time. It also helps that there has been a dearth of IPO activity over the last year. Oh, and of course, the overall equities markets have been in a powerful bull mode, which is always critical for IPOs.
Overall, things are lining up quite nicely for the Snapchat IPO, yet this is probably not a stock to hold on for too long.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
