Snap Inc. (NYSE:SNAP) was one of the most highly anticipated IPOs of the year, jumping out of the gate 44% higher than its $17 price in its first day of trading. Unfortunately, reality has caught up with SNAP stock, and things are getting worse today with a downgrade by one of its backers just three months after its offering.
Citi Research dropped Snap shares from “Buy” to “Neutral” on Thursday, also lowering its price target from $24 to $20 — still representing potential upside, but just 6% worth. Analyst Mark May says “slower than expected roll-out of these new channels/platforms” has Citi worried that monetization growth might be slower than they had originally forecast.
He also believes heightened competition and “Android issues” will slow the rate of user growth, which he now expects to come in at 9 million daily active user net adds, from 12 million previously.
This feels like a continuation of Snap’s first quarterly report as a public company May 10, that showed growth of its daily active users (DAU) wasn’t nearly as robust as analysts were expecting. SNAP stock cratered more than 20% on the news, but recovered about half of those one-day losses.
Millennials love Snap stock. I do not. About a week after Snap announced its Q1 2017 earnings, I wrote that no one, not even billionaire hedge-fund investor Dan Loeb, was going to save Snap stock until the company started making money.
In a previous article in April, I suggested millennials broke the cardinal rule of investing by buying IPO shares in a company that wasn’t profitable.
I Get Why Millennials Like Snap Stock
A millennial friend of mine traveled the world in 2016, hitting lots of spots in both Asia and Europe. Everywhere he went, I got Snapchat updates of where he was and what he found valuable in those various places. It’s a great piece of technology that allows people to tell a story as it unfolds, 10 seconds at a time. It’s addictive, for sure.
But just because something is fun to use doesn’t mean it’s going to be profitable.
According to Robinhood, the stock-trading app that allows you to trade stocks commission-free, the average age of its clients buying SNAP was 26 — four years less than the average age of its entire clientele.
“Snap’s IPO revitalized investing among the younger generation,” notes Baiju Bhatt, the co-founder of Robinhood. “We also saw a surge in new accounts, with many new customers opening up their first brokerage account.”
Hey, I’m all for young people getting excited about investing, but you still have to do the research to corroborate your thesis. It’s not enough to say, “Every single one of my friends uses it. I think it will be really successful,” as 17-year-old investor Spencer Wilson did in USA Today.
The Better Way
It’s too late to implement today, but if you’re considering an IPO like Snapchat in the future that doesn’t make money, consider buying an IPO ETF.
There are two ETFs that invest in U.S. initial public offerings: the First Trust IPOX-100 Index Fund (ETF) (NYSEARCA:FPX) and the Renaissance IPO ETF (NYSEARCA:IPO).
FPX is the older and bigger of the two getting its start in April 2006. As of June 2, it had $832 million in net assets. It invests in 100 of the largest stocks in the IPOX Global Composite Index, usually added after six days trading as a public company and remain in the index for up to four years.
Snap stock is currently FPX’s 17th-largest stock, with a 1.28% weighting. Top weights at the moment are AbbVie Inc (NYSE:ABBV) and Kraft Heinz Co (NASDAQ:KHC), held between 9% and 10%.
IPO went live on Oct. 14, 2013, but it has managed to pull in only $14.2 million in its three-year-plus history. This ETF tracks the performance of the Renaissance IPO Index, which invests in U.S.-listed equities that have gone public in the last 500 trading days. Once in the index, it trades for 500 days and then gets removed. This has a much different look up top, led by Ferrari NV and TransUnion (NYSE:TRU).
Snap stock is currently IPO’s 11th-largest holding, with a 3.33% weighting — more than double its heft in FPX.
Which Should You Buy?
Well, that’s up to you.
Both ETFs charge 0.6% annually, which isn’t cheap given that both are essentially passive investments, but it’s not outrageous either.
I think it really comes down to two things: First, how much do you like SNAP or the stock you’re looking at buying? And second, do you feel comfortable with so few assets gathered to date by IPO?
If it were my decision, I’d have to go with FPX, which invests in almost twice as many stocks as IPO and isn’t going to be on the ETF Deathwatch list anytime soon.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.