What is an Initial Public Offering (IPO)
(+ my thoughts on SnapChat)
What is an IPO?
An Initial Public Offering, or IPO, is when a private company goes public and offers shares on the stock market. The company is then considered publicly traded. Companies go public for several reasons. One reason is it allows the company to create capital in their business that could then be used towards research and development, gaining new products, or growing as a business and becoming a profitable company for us as investors.
IPOs can seem very exciting because most people want to be able to buy the stock as soon as it’s available. The one company that is going public soon that everyone is really excited (and uncertain) about is SnapChat.
My thoughts on SnapChat (SNAP)
If you are not familiar with SnapChat, it is a social media company that allows users to post short video clips (with filters) that disappear in 24hrs.
First, let me just say it’s one of my rules for trading and investing to NOT buy stocks at IPO. I would like for a company to come out and be public for three months to a year! Show me that you're profitable or at least have the potential to be profitable! I wait and give the company some time to prove itself. At the end of the day, they are the new kids on the block and I want to see that they are going to do something great with my money. If I see that the business isn’t profitable and I don’t understand the business model, I won’t invest. If it’s not meeting my criteria for trading, I won’t trade.
I know people are thinking...
“Snapchat is hot right now! If I don’t get on it, I’ll miss out!”
I’ll miss the opportunity to make lots of money!
Something else you should know about IPOs is when the stock is first offered, you do not have the ability to buy right away. The IPO is offered to a certain group of people first. This group of people are called and told that the company is going public and are asked if they would like to buy shares. This is done before the stock hits the market and increases the price (SNAP was originally offered at $14 and hit the market at $24 for the rest of us).
After the stock hits the market, a lot of excited people are trying to make a quick fortune so they rush to buy only to sell the stock later. This is what happened to Facebook. They were full steam ahead and then there was this big sag but have since recovered and are now doing very well.
So here’s what concerns me with Snapchat…
A what company??
I also think that they are kind of confused about what type of company they are. They are calling themselves a camera company like GoPro. I haven’t seen them make a camera yet, have you?
I would consider them a tech company. They are an app not a camera company. Also, they are considering their competitor Apple, Google, and Twitter. Which makes a little more sense if you’re a software company. Not if you’re a camera company. Then, they are calling Google a competitor but they are doing business with Google.
Snapchat's servers are based on Google's cloud, so if the two companies get into a tiff what happens to Snapchat? How can they recover and quickly switch to a different cloud platform? Why not just build their own platform?
That might be one of their goals with going public. By going public, Snap can create capital so that they can have their own cloud service or move to a different one. I just feel that laying in bed with Google is just bad for business.
Another thing is, their shares won't come with voting rights. Which means investors will have no say in how the company is ran. The owners will pretty much have full control. I just don’t know if I want that. I need a few more people to weigh on decisions.
No profits to be had
Their expenses are increasing rapidly. They increased their revenue by600% last year over 2016 however their expenses are going up just as fast. So you’ve increased your revenue by 600% but you’ve also increased your debt by just as much which isn’t a good thing. You can have bomb sales but if your debt is outweighing that then it’s kinda pointless. That is pretty much where Snapchat is right now. They have this crushing debt. Their revenue looks good but if you stand it next to their debit, it’s not looking too good. SnapChat even said in their SEC filing that they "may never achieve or maintain profitablity”!
So, you're confused about what kind of company you are, you don't want to let investors vote on company matters AND you don’t know if you will ever be profitable? But, you want us to give you how much money?
I just can’t put my money in that.
Snapchat also has increased competition with Facebook coming out with Instagram stories (and now stories in Facebook Messenger). We all know that Facebook is the "gorilla" in the social media market. They are Deboing people! They are just taking everybody’s features and making them their own. I feel that Facebook can bounce back and put stuff on the market a lot faster, although Facebook can make it a little cleaner. I feel that Facebook kinda half asses new features just to get them out there faster but they do come back and clean it up.
Snapchat is also geared for the younger audience: the millennials, the teenagers. We all as a society have a small attention span and teens... well, they aren't loyal.
They’re like “Squirrel” and then they're off to the next big app. Snapchat may lose that big following at some point and they have to be prepared for that.
Join the Conversation
Got your eye on Snap stock? Leave me a comment and let me know!
Join The Exchange to get access to my 7 day free course and weekly tips about trading the stock market straight to your inbox!