Amazon (AMZN) shares retreat after wide Q2 earnings miss >>> READ MORE

3 Reasons to Stay Away From the Snapchat IPO

Competition from Instagram only scratches the surface of Snap Inc.'s problems


This week, Snap Inc. will finally officially file for its initial public offering, which is unfortunate for the Snapchat IPO with doomsday chatter aplenty.

3 Reasons to Stay Away From the Snapchat IPO
Source: Shutterstock

Instagram — which for those who forgot is owned by Facebook Inc (NASDAQ:FB) — released a rip off of Snapchat Stories last August and it appears to be eating Snapchat’s lunch.

Snapchat Stories are down 15% to 40%, Instagram Stories have seen a surge and Snapchat creators are seeing their total views decline as much of 30%.

But despite the comparison and competition between Instagram and Snapchat, this oversimplified storyline barely scratches the surface when it comes to avoiding the upcoming IPO. If anything, the competition with Instagram should serve as an industry-wide reminder that barriers of entry in the social space are impressively low. But beyond that, there are plenty of other reasons to avoid the Snapchat IPO before it hits Wall Street.

Here are three more reasons to stay away from the Snapchat IPO.

Monetization Question Marks: It can be tempting to lump all social media apps and companies into one category and compare their demographics and popularity, but it’s also important to remember that, from a business perspective, all the users in the world are irrelevant without monetization — especially for Wall Street. This was the big question mark around Facebook’s IPO and it took the company several years to prove it had the advertising chops to drive revenue. Snapchat is working on becoming a news hub (much like Facebook) and on rolling ads on its stories. But it’s likely that many advertisers are simply trying out Snapchat because they heard it’s what the kids are using these days. They’re going to need to see real results to keep coming back.

Looming Lawsuit: Another red flag for Snapchat is a lawsuit from a former employee, which is problematic for several reasons: 1) the content of the lawsuit itself and 2) because it will likely cost Snapchat legal fees and/or a settlement. But let’s focus on the content for now: Former employee Anthony Pompliano says the company mislead him and has been misleading investors about its valuation. At the very least, this could add some psychological baggage for investors already skeptical about tech IPOs, especially considering highly anticipated IPOs like GoPro Inc (NASDAQ:GPRO), Fitbit Inc (NYSE:FIT) and Twitter Inc (NYSE:TWTR) have been not-so-hot.

Inherent IPO Risk: And that brings us to our final, broader point: IPOs are inherently risky. This isn’t just for companies with newer business models in newer industries. Even with a tried-and-true company, the psychology around IPOs can lead to lots of ups and downs and a lot of variance in valuation. I always recommend investors wait for the dust to settle before hunting for game changers. Even if I believed Snapchat was a game changer or a value — which, we’ve established, I don’t — I would suggest you stay away from its early days on the public markets.

All the chatter about Instagram, false valuations and question marks about long-term monetization viability just add to the list of cons.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC