IPOs have many advantages. Just some include: much more exposure; a windfall of cash; the stock can be used as currency for acquisitions; and employees will have an opportunity to get liquidity.
But of course, there are notable risks as well. And we are seeing this with Snap Inc (NYSE:SNAP).
It seems that the shares are in free-fall. Since hitting a high of nearly $30 in early March, SNAP stock is now at a lowly $12.65. During this period, the company has lost about $16 billion of market cap. This is actually more than the value of Twitter Inc (NYSE:TWTR)!
Now, there are some factors that are really short-term in nature — and probably should not be too concerning for investors in SNAP stock. One is the lock-up expiration. Granted, 1.2 billion of SNAP stock will be available for sale during the next couple weeks.
Yet there are some things to keep in mind. Heavy amounts of SNAP stock are concentrated in the hands of VCs and executives. For the most part, they have various restrictions on the amount they can sell. Besides, it never looks good when insiders engage in wholesale dumping of the company’s stock.
Another factor has been the heavy short-selling. Actually, this is quite normal for an IPO, since the valuations can get stretched. But it will probably not be long until short sellers begin to unwind their positions — which will provide a nice source of demand (note that a short position is covered when it is bought back).
And besides, with all the negative sentiment right now, it seems reasonable that there should be a bounce back. Perhaps this may come when the company reports its earnings on Thursday.
But again, all this is about trading for quick gains. Yet when it comes to taking a long-term approach, there should be quite a bit of caution.
The history of digital consumer platforms can be brutal. We’ve seen the flameouts, like MySpace. But there have also been those companies that have suffered prolonged declines, such as TWTR, Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA). The fact is that digital habits can be fickle.
But as for Snap, the company must deal with the enormous challenge of fighting Facebook Inc (NASDAQ:FB). It’s almost an unfair matchup. Hey, FB has essentially been knocking off features of Snapchap and leveraging this with its Instagram property.
And for the most part, it seems to be working like a charm. Yesterday FB announced that users of Instagram who are under 25 spend about 32 minutes a day on the app. By comparison, Snap logs about 30 minutes on average.
Something else: Instagram also has 250 million DAUs (Daily Active Users), which compares to Instagram’s 166 million.
All in all, the situation may be too late for Snapchat. According to a report from CNBC, there is anecdotal evidence that ad agencies are prioritizing Instagram. Some of the issues for Snap involve lack of measurement of the audience and engagement as well as difficulties in using the ad systems.
It also appears that celebrities are not as interested in the app, since the user base is not big enough.
Bottom Line on Snap Stock
The irony is that FB also had a horrendous IPO. Yet Mark Zuckerberg showed his strong leadership skills when — a few months after the offering — he gave an interview with Techcrunch. He admitted the errors of his mobile strategy, which relied on technology that did not pan out. He also talked about a major restructuring of the FB organization, which would allow for more innovation and nimbleness.
More importantly, he had a compelling strategy, saying: “”Now we really are a mobile company. All the code we write is [for] mobile.”
It was what Wall Street wanted to hear – and yes, Zuckerberg went on the deliver in a big way.
Well, in light of this, I think Snap’s CEO Evan Spiegel needs to do something like this. He must acknowledge the issues but also set forth his mission for the company. A forceful, convincing message would go a long way to get SNAP stock back into gear.
But this needs to be done soon. It does not take long for negative perceptions to sink in and wreak havoc on a company. And of course, Zuckerberg is certainly not going to let up in his battle.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
