Snap Inc (NYSE:SNAP) had its third-best day as a public company on Monday following headlines that some heavy hitters bought into the troubled social media IPO. SNAP stock gained more than 8% on the day, though it’s giving some of that back on Tuesday.
Bulls will point to this price movement as a sign that investors haven’t lost faith in Snapchat’s parent, despite the fact that SNAP shares have lost half their value since putting up a 44% first-day return.
It’s nice to report that hedge fund billionaires Dan Loeb and Louis Bacon bought 2.25 million shares and 1.33 million shares, respectively, in the first quarter. But it’s important to remember that both investments represent less than 1% of both companies’ respective portfolios.
In the case of Loeb, Snap is one of 38 holdings in a $10.2 billion portfolio. Sure, 38 holdings is a pretty focused fund given its size, but when $2.4 billion of the portfolio is held in one stock — Baxter International Inc (NYSE:BAX) — I think it’s safe to say SNAP stock is an afterthought.
At Moore Capital Management, SNAP stock is one of 193 holdings in a $3.7 billion portfolio. A total of 25 stocks is bigger positions making it hardly the hedge fund’s top idea.
It’s All About Making Money
The fact that SNAP stock hit the ground running March 2 in its first day of trading — closing at $24.48, up from a $17 IPO price — is a testament to the strength of the bull market, now in its ninth year, as well as the general weakness of the IPO markets.
“People want leadership. And in the absence of genuine leadership, they will listen to anyone who steps up to the microphone,” Lewis Rothschild, played by Michael J. Fox in the movie The American President, said to President Andrew Shepherd, played by Michael Douglas. “They want leadership, Mr. President. They’re so thirsty for it, they’ll crawl through the desert toward a mirage, and when they discover there’s no water, they’ll drink the sand.”
If you’ve seen the movie, you know what comes next.
“Lewis, we’ve had presidents who were beloved, who couldn’t find a coherent sentence with two hands and a flashlight,” said President Shepherd. “People don’t drink the sand because they’re thirsty, Lewis. They drink it because they don’t know the difference.”
Let’s face it, IPOs aren’t the game they used to be.
According to Fortune, two figures highlight the problem with publicly traded companies in the U.S. The first is that just 128 companies went public in 2016 — the lowest number since 2008. The second is a 37% decline in U.S.-listed companies since the high in 1997.
Taken together, retail investors, especially millennials, broke the cardinal rule of investing when they bought SNAP stock, a money-losing business at an unreasonable valuation.
Snap currently trades above its IPO price, and it’s still unreasonable.
Jeff Bezos Is a Rarity
Very few businesses can go to market losing money and live to tell the tale. Amazon.com, Inc. (NASDAQ:AMZN) is one of the few companies to do it. Its first day of trading was May 16, 1997. It gained 31% from its $18 IPO price on that fateful day 20 years ago.
Amazon didn’t make its first profit until 2003, seven years after its initial public offering.
I can assure you that SNAP stock won’t exist in seven years if it doesn’t make money between now and then. How do I know? Snap CEO Evan Spiegel is no Jeff Bezos.
Bottom Line on SNAP Stock
Both Dan Loeb and Louis Bacon have their reasons for owning Snap. They’re not billionaires for nothing.
However, their purchase of SNAP stock should not be a “buy” signal for the average retail investor. Both can afford to lose their entire investment and live to fight another day. You can’t.
As far as I know, earnings growth is still the biggest driver of share prices. Until Snap can do this, I don’t see how its stock’s future is a good one. I just don’t.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.