Yesterday's conversation during the ride home was about as damning an indictment of investment potential as I've ever heard…
Do you use branded filters?
What's your favorite company?
Which of the highlighted stories do you read regularly?
Let me tell you why this conversation is so relevant to your money.
The next six months will be critical.
My youngest son and his best friend sat in the back seat with a look on their face that fluctuated somewhere between bewilderment and deep thought as my colleague and good friend, Matthew Coble, peppered them with questions.
"Snap's management is delusional," he pointed out.
I couldn't agree more.
The company is still the most dangerous IPO I've ever seen.
The boys are 15 years old and both use Snapchat extensively to interact with their peers. Yet, neither could recall a single one of the fundamental variables that make the company such a "valuable" property on Wall Street despite the fact that they are supposedly the primary demographic.
Filters… no business value, just occasional comedic relief.
Branding… complete breakdown in the user experience with not a single company retained in their memory banks despite being bombarded by advertising (and ignoring it) as they use the app.
Cultivated stories… the primary demographic doesn't give a you-know-what.
Matt, who is a digital strategy expert with more than 20 years of experience working with the world's top brands, then went for the jugular: "Snap's business model is a joke because there is no business model that will allow the company to sustain the platform with sufficient revenue to run it."
The company lost $2.2 billion during its first 90 days as a public company. That takes talent – sarcasm fully intended. It will lose gobs more money in the months ahead.
CFO Drew Vallero said during the analyst conference call that Snap Inc. (NYSE: SNAP) is "still in investment mode," which strikes me as Wall Street speak for "we still expect gullible investors to buy our stock."
The one metric you'd want to see is going in the wrong direction – user growth is decelerating.
So now what?
IPOs Are a Rigged Game You Don't Want to Play
When I came into this business more than 35 years ago, companies with legitimate business models and real cash flow went public because they needed additional capital to grow already viable operations.
Now companies go public because they've got an idea they hope to "monetize." More often than not, they're huge money losers hoping to "cash out" on your dime – like Snap has.
Back then, going public was something you did when you wanted to stay in the game. Now, founders and early investors are looking to the individual investor as an exit – meaning you are going to make them worth billions instantly, even as they transfer all the risk of ownership to your wallet.
Case in point, 26-year-old Snap CEO Evan Spiegel reportedly got a $750 million bonus for taking the company public on top of the $5.5 billion worth of shares he had as the IPO was priced – that you paid for (if you bought into this nonsense).
And that's the rub in today's markets.
Whether a newly IPO'd business lives or dies is moot as long as the IPO "works."
That's a leap of faith in this instance, considering that 97% of Snap's revenue over the past two years has come from short-term advertising. Long-term advertising agreements apparently don't exist, although that's something Snap wants to achieve… but which it may not… ever.
Snap execs say that they've got this handled because they're focused on growing the amount of time and energy each user spends on its platform, whereas Facebook Inc. (Nasdaq: FB) focuses on growing its user base. I'm not sure that's true. Instagram, in fact, recently overtook Snap in terms of time spent per user, according to Modern Trader.
The situation reminds me of GoPro Inc. (Nasdaq: GPRO) and Fitbit Inc. (NYSE: FIT), both of which were supposedly all about user engagement, too, and both of which have flamed out spectacularly. The former hit a post-IPO peak of $86.87 and now trades at $8.58, having lost more than 90% of its value. The latter hit a post-IPO peak of $51.64 and now trades at $5.80, having lost more than 88% of its value.
Then consider Nintendo, which lifted briefly before plummeting 18% in a single day after executives admitted Pokémon Go would have only a "limited" effect on the company's bottom line.
Three Rules to Take Wall Street's Weapons Out of the IPO Equation
So how do you profitably play an IPO?
There are three Total Wealth Tactics that apply.
- Wait until the euphoria has passed and the insider lock-up period is over. You want to give the institutional traders time to separate nervous traders from their money. Then, average in over time if you want to own shares.
- Make the company prove that it merits your money and your trust. That usually takes a few quarters. The reason is simple. IPO hype is based on what "could be," not what "is." Many times management cannot make the jump, and you do not want to pay the price for finding out which is which.
- Use lowball orders to get the price you want. It's always better (and more profitable) to name your price and have the market come to you than to try and chase a hot trade. Temptation is the most powerful of all emotions, which is why Wall Street hypes IPOs the way they do.
If you're a nimble trader with strict risk management and money to burn, then knock yourself out. You might get lucky. I'll shake my head and high five you if that's the case!
If you're an investor, wait a year for things to shake out and only buy in if the business case – rather than pre-IPO hype – makes sense for a longer-term hold.
You can buy later when the company you're interested in is more stable and you risk less for doing so based on cold, hard analysis, proven management and, chances are, good old-fashioned profits.
John Jackson, an IDC analyst, summed up my feelings on the matter nicely on CNBC when he said that "Snap's stock is no place for the faint of heart."
To which I will add, "but the foolish will love it."
Urgent: Feds use obscure loophole to threaten retirees. If you have a 401(k), IRA, or any type of retirement account, this could cause you to miss out on $68,870 or more. Learn more…
The post The Next Six Months Will Be Critical for Your Money (and Snapchat) appeared first on Total Wealth.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.