Why Snapchat May Be the Single Most Dangerous IPO I've Ever Seen

I hate playing the role of a spoiler when there's $25 billion on the line, but that's exactly what I've got to do today.

At the risk of shattering dreams from here to Saigon and annoying every venture capitalist in between...

Snapchat may be the single most dangerous IPO in history.

There's only one way it fits in your portfolio.

Five Reasons Every IPO Is Rigged

News broke last Tuesday night that Snap Inc. filed for an IPO that could value the popular messaging platform at $25 billion. Predictably, the Internet went berserk...Snapchat stock news

  • "One of the biggest tech IPOs in years" - Reuters and NBC.com
  • "Snapchat's IPO Could Snap the Stock Market" - Fortune
  • "Inside Snapchat - The Biggest Tech IPO of 2017?" - zachs.com
  • "Snapchat may be worth $30 billion with IPO filing" - CNET

I could only think to myself as I drove home from the office, "Here we go again."

Millions of "mom and pop" investors are itching to get a piece of the action believing that they're going to make a fortune when getting burned is far more likely.

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It's not for nothing that the world's stock exchanges are littered with the bones of failed companies that went public when they had no business in the world doing so.

1. The IPO process is flawed. When I started my career, companies went public because they wanted access to capital that would help already strong businesses get stronger. Now they go public because they have "potential" - a word I use with every bit of sarcasm I can muster.

2. Every IPO is an exit, not an entry. Think about this for a minute. Silicon Valley venture capitalists have put a few billion into Snapchat privately (after three or four earlier rounds of financing) and they're counting on an IPO to cash out at 10 or even 20 times their money. The only way that happens is to convince you - the retail investor - that it's "worth" the risk by offering shares to the hoi palloi. You and your money are literally last in line... behind founders, lawyers, angel investors, venture capitalists, and investment bankers, every one of whom gets a cut of your money. Again - and I cannot stress this strongly enough - as they cash outon your dime.

3. Private investors ahead of the IPO do not take the same risks you do after the IPO. When a private angel investor or venture capitalist buys shares, he is paying whatever he thinks the company is worth based on privately negotiated contracts and provisions intended to protect his money. The entire transaction is designed to protect his assets. There are even clauses in some IPO contracts that allow early financiers benefit if the price drops - something most retail investors who are betting on an increase cannot fathom. When you buy shares of a publicly traded company, you are paying what the market will bear and you risk everything. There isn't an investment banker on the planet who gives a damn about whether or not the investing public makes a dime on the IPO. Your sole purpose is to guarantee that they get their capital first.

4. $25 billion is only believable if you fall for it. Silicon Valley manipulates the hell out of these numbers and it's one of the dirtiest secrets in modern finance. As you might imagine, this is information they don't want you to know.

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Company founders and initial backers start with numbers that are completely cooked up from the get-go. The goal is to make any valuation they come up with seem as high as possible no matter how cooked up or absurd it is. The reason they do that is because that's how you create the illusion that a company is mature and credible when it comes to attracting desperately needed talent, business partners and - ta da - more funding.

Profit Opportunity: The Ultimate Must-Have Investment

Then, those same folks hold the company private as long as they can to maximize the "value" while simultaneously creating retail investment demand. You really don't believe all those stories and puff-pieces you see about gee-whiz technology and the brighter-than-Einstein founders who created it are "leaked," do you?! I didn't think so. Me neither.

Cash flow, believe it or not, is almost irrelevant. It used to be back in the day, but not anymore. What matters today is how many users are on board even if they're not paying a damn thing for the product they're using. That's how you "monetize eyeballs" - which is Silicon Valley buzz-speak meaning how you convert users to paying customers.

A rational person knows that you cannot spend more money than you make, but spending more capital than you take in is standard operating procedure for almost every company hoping to IPO these days... because otherwise you might be missing out on potential.

If you really want to see what Snapchat or any other IPO is worth for that matter, take a look at the common stock valuation assigned to shares employees hold. Not only is that figure typically far smaller, but it's got the added advantage of being calculated by accountants who are professionally accountable and liable for accuracy (as opposed to investment bankers, lawyers, and founders who arguably are not and who have every incentive to pull the wool over your eyes).

5. FOMO - fear of missing out. Silicon Valley's hype machine has gone into overdrive in recent years and successfully convinced millions of investors that the only way they'll make a killing is to be on board or they'll miss out. I can't say I blame them - every investor I've ever talked to dreams of finding the "next" Google, Facebook, Amazon, or Microsoft.

So they gear publicity, offerings, stories, and every other form of hype they can think of to convey urgency, knowing full well that the ridiculous, eye-popping valuations they've come up with will get overlooked when the investing public's greed gland gets going.

Obviously, I'm pretty jaded, but that's very deliberate on my part.

In October 2013, I told you to avoid Twitter Inc.'s (NYSE: TWTR) IPO - then, I warned against owning the stock again in June 2015. Shares fell 60% to a low of 13.90 on May 3 when the rumor mill got started about a White Knight buyer.

In August 2014, I told you to stay away from Go Pro Inc.'s (Nasdaq: GPRO) IPO - and today it's trading at barely one-third of its IPO price.

In June 2015, I appeared on Neil Cavuto's FOX Business show to tell investors to steer clear of FitBit Inc. (NYSE: FIT) - today shares have fallen by 75% from where FIT traded on December 2015, shortly after its IPO.

My job, after all, is to help you make money... not take a wild flyer that could result in you losing it all.

IPOs are little more than a get-rich quick scheme with the odds stacked so heavily against you that house odds in Vegas seem downright conservative by comparison.

There's only one way to play a Snapchat IPO...

...as a purely speculative undertaking.

Keep your money on the sidelines until the company proves it's worth your investment.

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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