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

Keith Fitz-Gerald Nov 18, 2016

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 Tuesday night that Snap Inc. filed for an IPO that could value the popular messaging platform at $25 billion. Predictably, the Internet went berserk…

…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.

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 out on 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.

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.

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’s 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’s IPO – and today it’s trading at barely 1/3rd of its IPO price.

In June 2015, I appeared on Neil Cavuto’s FOX Business to tell investors to steer clear of FitBit – today shares have fallen by 75% from where it 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.

Until next time,


19 Responses to Why Snapchat May Be the Single Most Dangerous IPO I’ve Ever Seen

  1. Kevin Beck says:

    I agree with all four points on your list, but especially with #2 and #4 when it comes to the attitudes of small investors. These can give dangerous results to one’s portfolio. And I’m not saying that these investments should be ignored altogether; these are things that should be considered, but never seem to be.

  2. Fabian says:

    And still, people are going to jump on that poc.

    • Keith says:

      Yes, Fabian, they will and sadly many will find out the hard way that they were speculating when they thought they were investing.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  3. Dave says:

    You can’t really believe what you wrote above about all IPO’s. Your comments are true of some and only some IPO’s.

    Take a look at the IPO prices for Google, Amazon, Facebook, Microsoft, Intel, Dell computer, etc. Had you made a modest investment in any one of these companies at their IPO prices, you would be a wealthy person today.

    • Keith says:

      Hello Dave.

      You make a very valid point but perhaps not (respectfully) for the reasons you think – buying in at the get-go today involves orders of magnitude more risk than it used to when the IPOs you reference hit the street. That’s why my view is what it is…today’s IPOs are purely speculative undertakings and should be treated accordingly. Most investors are totally unprepared for the risks and the volatility that comes with it.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

    • Fed up! says:

      True but hindsight is 20/20. If you comprehend the article he just suggesting you do your homework and not believe the hype.

    • bro ham says:

      Dear Dave, Snapchat is a disappearing instant message. Amazon was whole books. Google searched the whole internet. Facebook has non diappearing networks of people. Microsoft aloowed us to want to use all the more intel chips on Dell delivered shipMint$. Snapchat has a “monopoly” and last-mover-advantage[cmon Dave] in one liner self erasing messages. if it ever “Takes Over” Dave, people will have their second phone video record all their disappearing mission impossible messages. Cameras are cheap if Explicit Secrets become all the Rage. An Investment is a good placement for a Position Sizeable amount of blood sweat and years of tearsful of hard earnings. A speculation is a Saturday night special fight or 2. Like $5. Or 20 spot if youre letting it rip. 100 if youre frank sinatra. or a bookmaker. Speculation in the latest GREATEST instant evaporating messages is not a good way to invest your money even if you hold it for the ‘longterm’ ROTFLmyShittinAssOff. Dave, in the ‘longterm’ we are going to be in virtual reality realtime messaging, like 3 years. Stock market reCorrection or two is due anytime and overdue. What use does any non flowing pre profitable BIDness do to your risk-reward ‘protected?’ future funding of CLEAR winners? As Keith kicks this dead horse for us: specu-LATE-ive, at best. At worst its a near-terminal sure loss on a tossed crapshoddy ship of greater april fools. God bless the children and their parent$ plans. Go get m Dave!

    • Zen says:

      I was under the impression that even novice investors know that by the time you read about an IPO in the news it’s too late and the money’s already been made by those who caught the boat early, but your post reveals that I was wrong. Have you looked at and addressed the 5 points he raises? They’re pretty strong points and hard to argue against if you know anything about the IPO process. For a retail investor the most dangerous are points 1-3. I’ve observed that most IPOs these days are an exit for early investors. I’ve been an early investor in private companies for precisely that reason and have done quite well at IPO by taking the money of people that pile in after reading about the IPO in the popular press! He did not in any way say you won’t make money if you invest in overhyped tech IPOs,nobody knows what the share price will do after. The market determines that. Late investors may very well make money. He simply pointed out the ways in which the dice is loaded against them and if I were you I’d take the lessons to heart.

      • Keith says:

        Thanks for some excellent commentary and observations here everybody. Your input makes Total Wealth a great place to be, to share and to learn!

        Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  4. Jackie says:

    I’m stuck with Twitter at $51.66 because I listen to san idiot with a very big title that said it doesn’t matter when you get in just get in. I guess it does matter.

    • Keith says:

      Yikes – hopefully I was not said idiot!

      All is not lost though. If I may be so bold…

      1 – do you/did you run a trailing stop “just in case”? I know that seems like water under the bridge now but even mistakes are learning experiences to paraphrase my grandfather who always had a habit of stating the obvious when it wasn’t. You can put one in now or reinforce the need to use one “next time.”

      2 – What are the key learnings here – and I’m not talking about the stock necessarily. Every one of us – myself included – has idiosyncrasies so using an experience like this one for self-reflection can help you avoid them the next time around.

      3 – Is there an alternative investment available? – The money you have left presumably is still worth something which means it’s not trapped…if you have an alternative choice that can help get it headed in the right direction again. Talk with your accountant or tax professional because it’s also possible to use situations like this to your advantage when it comes to offsetting capital gains, for instance.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  5. Steve says:

    Risk/reward, that is what the stock market does, while giving some companies the chance to make it big. Most company’s take your money, some turn out to be a solid company. The question is: Will Snapchat be one of them????

    • Keith says:

      Well said Steve. I think that the jury is still out on whether or not it’ll be solid. The nearest comparison I can think of is Facebook which had a stellar IPO then tanked only to find stability later as it matured.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  6. Daring Dave says:

    Im gonna day trade the Snapchat ipo Dave. Less than $77. Can’t wait for the put options…borrowing for full-on-shorting is not worth the maximum possible payoff of only a double. I’ll bet $ worth of put option contracts against Snapchat shares non-evaluble, ‘in’accountable growth every month until it snaps me some of their disappearing soon to be missing ipo money.

  7. Do B Care Fool says:

    you can buy that ETF of Post-LockUp-SellOff-Period IPOs. Youre not missing anything Dave, just wait for all the insiders to dump their shares and flush the stock price way down after its first season. . . then this etf buys into the squashed price per share on promising FAIRly newly issued and dumped off orphaned ipo’s at a fractional reserve price. Like clockwork, according to the lock-up period on the owners’ Calendars.

    • Keith says:

      Love the moniker “Daring Dave” especially in light of your strategy!

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

    • Keith says:

      And Do B Care Fool, too! You guys definitely get the creativity award today.

      Based on the nature of your comments, I’d venture that you’ve both got a handle on trading and the nimbleness that goes with it when it comes to a Snapchat-like situation.

      Best regards and thanks for being part of the Total Wealth Family, Keith πŸ™‚

  8. Thanks for Funding says:

    I will speculate a few thousand on the IPO, look to cash out within a couple weeks (or less) with a goal of making 10%. Then take that couple hundred of “house money” and buy long dated puts and just sit back and watch the carnage !! Love using OPM ! (It almost doesn’t hurt as bad to use OPM to send the Gubmint jackals their 50%)

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