SNAP… Still The Most Dangerous IPO I’ve Ever Seen

Keith Fitz-Gerald Nov 10, 2017

Last November I called Snap Inc. (NYSE:SNAP) the “single most dangerous” IPO I’d ever seen and urged you to give the company a wide berth… or take your money to Las Vegas where at least you’d have fun losing it.

Legions of Silicon Valley faithful weren’t happy I said so, and neither were scores of Wall Street analysts doing their best to convince you that Snapchat was a ticket to easy riches.

Fast forward to today.

Snapchat badly missed Q3 earnings Tuesday and, not surprisingly, the company’s stock is getting pummeled. It’s down a stunning 19.21% and trading at $12.36 per share as I type.

Anybody who’s gone along for the ride is now sitting on mounting loses of at least $14.73 a share and 54.4% from a post-IPO peak value of $27.09. That works out to a staggering $16.55 billion loss of capitalization and would require the stock to move 119.17% just to break even.

Unbelievably, the dialogue in the media at the moment is, “Is the company a ‘Buy?'” – a question I myself was asked Wednesday morning on Varney & Co.

My answer? No way in you know what, and not unless you like losing money.

Lottery tickets – which is what Snapchat represents – have no place in a legitimate investment portfolio.

Snap Inc.:

  • Failed to bring new users onto the platform. In fact, the company added a pathetic 4.5 million users during the quarter which gives them no hope of ever competing effectively against the likes of Facebook Inc.’s (NasdaqGS:FB) Instagram and the 500 million daily users it has.
  • Missed already laughably low revenue expectations by bringing in a paltry $208 million.
  • Posted a net loss of more than $443 million.

Frankly, my jaw is on the floor – and it’s not a reaction to Snap’s numbers.

It’s that Wall Street continues to ply the same old tired story to millions of investors who – unbelievably – fall for the premise of quick riches when there is no resounding business case to be made.

Snap’s abysmal results make it abundantly clear to me that CEO Evan Spiegel and his team have no idea what they’re doing, let alone the kind of visibility into their customer base and business operations needed to make their Snapchat an ongoing, viable concern.

Take the company’s much ballyhooed Spectacles, for example.

They were supposed to result in hundreds of millions of dollars in revenue from people who were going to purchase them from vending machines and subsequently post the most intimate details of their lives online for the world to see.

Problem is, I’ve never seen a single person wearing them, which is why I’m not surprised the company took a $40 million write-off on excess inventory. That’s Wall Street-speak for “Snap couldn’t sell ’em at any price, so the accountants considered the Spectacles a complete loss.”

Thankfully, Wall Street’s analysts appear to be waking up.

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RBC Capital Markets analyst Mark Mahaney noted simply that the company’s executives “have less visibility into the business than we thought” and that RBC made “the wrong call” with a buy at $24. His target… $15.00.

Piper Jaffray analyst Sam Kemp suggests that Snapchat’s management is “showing considerable fluidity in how it is managing its business,” and believes, “this reflects poor leadership under a corporate governance structure that lacks accountability for senior executives.” His target… $12.50.

UBS analyst Eric Sheridan penned a note to clients he called “SNAP, Crackle, Flop” in which he observed that the company will continue to “struggle on multiple fronts in the coming 12 months.” His target… $7.00.

I think the company is worth half that and only then to a buyer with very specific needs may reside in some of Snapchat’s code – a scenario I’m admittedly hard pressed to imagine.

So Now What?

Let Snap’s “story” – pun intended – be another lesson in a long line of lessons why you don’t want to risk your hard earned money on Silicon Valley’s whiz kids until they’ve proven they can run a profitable business with real customers.

IPOs are exceptionally dangerous for your money.

The world’s financial exchanges are littered bones of failed companies and the investors who fell for the hype associated with “potential” especially when it comes to social media. Remember MySpace? Ping? The Hub? ConnectU? Most investors don’t.

The best thing you can do for your money right now – especially with another soon-to-be-hyped-up list of IPOs slated for 2018 – is to remember these five crucial takeaways:

  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.

  1. 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 polloi. 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.

  1. 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.

  1. A massive valuation 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.

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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 any IPO is worth, 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).

  1. F.O.M.O. – 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” Alphabet Inc. (NasdaqGS:GOOGL), Facebook Inc. (NasdaqGS:FB), Amazon.com Inc. (NasdaqGS:AMZN) or Microsoft Corp. (NasdaqGS:MSFT)

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.

My job is to help you maximize profits and minimize risk, even if I have to call out Wall Street and barbeque a few sacred cows along the way.

Now, this doesn’t mean there isn’t a profit opportunity when it comes to IPOs. In fact, I’ve got one lined up that not only taps you into some of the hottest pre-IPO startups in the word today by putting your money alongside inside pre-IPO investors instead of at their mercy post-IPO. Plus, it delivers steady income, as well.

As one of the equity funds that owned Facebook shares before its 2012 IPO, the Fidelity Contrafund (FCNTX) was in a position to make a killing. And the fund has only ramped up its private investments since.

It’s moved decisively to corner the cream of the unicorn crop, with stakes in Pinterest’s $11 billion valuation, Airbnb’s $30 billion valuation, Dropbox’s $10 billion valuation, and even Elon Musk’s Space X valuation of $15 billion.

This basket of pre-IPO companies is extremely exciting because of the vast profit potential that could come from any single one.

For example, back in May of 2005, Facebook was valued at $100 million.

By January of 2008… $15 billion.

January of 2011… that number hit $50 billion.

That’s a rise of 49,900%.

No doubt you see my point. That’s the kind of change that can turn every $500 of pre-IPO investors’ money into well over $500,000.

All told, Fidelity Contrafund is one of the more aggressive funds for pre-IPO investing with nearly $1 billion in these companies. So, it’s your best bet in securing a slice of an enormous private equity pie.

Since its inception, the fund has returned more than 1,390% – enough to turn every $10,000 of initial investors’ money into $149,600.

To my way of thinking, FCNTX is the only way to play IPOs for maximum profits and minimum risk. As such, it’s a “backdoor” that wouldn’t otherwise be open to you.

FCNTX is part of a special group of investments my team and I call “26(f) programs.” They have the potential to generate thousands of dollars in extra monthly income for those who “enroll”. Find out more by clicking here.

Until next time,


Keith Fitz-Gerald
Chief Investment Strategist

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