Snap Inc. (SNAP): Snapchat IPO ALMOST Beats the Odds

They say you can place a bet in Las Vegas on almost any proposition. And while most of the action is on sports contests, the Snapchat IPO from Snap Inc. (NYSE:SNAP), I thought, would surely be attractive to visitors in the town’s sports books.

Source: Shutterstock

And so it was that I went online in search of Las Vegas odds on the Snapchat IPO. Looking for any kind of prop that investors could hang their hats on when it came to handicapping SNAP stock coming out of the gate, I wasn’t able to find much.

However, a website called Las Vegas Sports Betting in November had five props available to bet on. These are taken directly from its site:

What will Snapchat’s IPO be valued at?

Over 25 Billion Dollars: -160
Under 25 Billion Dollars: +120

Answer: $22 billion.

Those who bet the “over” prop would be out $160. Those who bet the under would win $120 on top of the $100 they bet.

What will Snapchat’s ticker symbol be?

SNAP: -300
CHAT: +225
BOO: +800

Answer: SNAP

So, those who bet on SNAP put down $300 and won an additional $100. The other two bets are out $100.

Which exchange will Snapchat (Snap Inc.) be listed on?

NYSE: -120
NASDAQ: -120

Answer: The New York Stock Exchange. Those who bet on NYSE won $100 on top of the $120 bet; those who bet on the Nasdaq lost $120.

Will Snap Inc.’s market capitalization have increased or decreased after six months following their IPO?

Increased: +155
Decrease: -220

Answer: Still to be determined, although Snapchat closed up 44% on its first day of trading from its $17 IPO price.

Will Snap Inc.’s shares close above or below the IPO price on the first day of trading?

Over IPO Price: EVEN
Under IPO Price: -140

Answer: Closed at $24.48, above its IPO price. If you bet over, you won $100; if you bet under, you lost $140.

What About a Higher First-Day Return?

One prop conspicuously absent from this list is the over/under on its SNAP stock finishing up 50% on its first day of trading. I wonder what the odds would have been for something like that?

Well, University of Florida professor Jay Ritter, known widely for his work studying IPOs, provides some clues for oddsmakers.

For example, Ritter found in his 2011 study Equilibrium in the Initial Public Offering Market that U.S. IPOs between 1990-2010 averaged first-day returns of 18%. Interestingly, only two years (1999 and 2000) saw average first-day returns greater than 50%.

We all know what happened shortly after that.

In 19 of the 21 years covered by the study, the average first-day returns between 10%-20%, suggesting the odds of SNAP stock finishing up 50% would have been extremely high.

However, Ritter also found in his study that the size of the average first-day return was heavily dependent on its initial filing price range — the Snapchat IPO was $14 to $16 — with the average first-day return 3% when priced below the range, 11% when priced within the range and an eye-popping 50% when priced above the range.

That, theoretically, would lower the odds.

The only problem? The oddsmakers wouldn’t know the price until the day before trading, so they would have little time to adjust the odds and gather sizable action.

Fortunately for Vegas bookmakers, Ritter has also tabulated the percentage of IPOs that price below, within and above the filing price range. Ritter’s study included 5,057 U.S. IPOs excluding those that had a filing price range midpoint of less than $8, ADRs, REITs, closed-end funds, etc. It found that 23% of these IPOs priced above the filing range.

Therefore, historical data suggests SNAP stock had a 1-in-4 chance of pricing above its filing range, which it did, but it failed to meet the 50% average first-day return for this group by 600 basis points.

I’m no bookmaker, but here’s how I’d have priced this particular prop;

Will the first-day returns for SNAP Stock be 50% or higher?

Over 50%: +300
Under 50%: -300

Answer: Snap’s first-day return was 44%. If this bet existed in Vegas and you chose under, you would have won $100 on top of the $300 bet. If you bet over, you would have lost $100.

If you bought $300 in Snapchat stock, you’d have made $132 on its first day of trading — 32% higher than if you placed a bet in Vegas.

Snap Inc. came pretty close to beating my odds. I wonder how it would have done against the pros?

I guess we’ll never know.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.