Should I buy the SNAP IPO?
If you had bought Facebook at its IPO price in 2012 you would be up 250%. Google back in 2004? Your investment would be up 1700%.
With the tremendous success of some IPO’s, it makes sense to hear clients ask me this question almost everyday. But before I get into it, let me take a step back. First of all, are you familiar with IPO’s?
An IPO, or initial public offering is the first time a private company is selling its stock or shares to the public. Why would they do that? It’s a way for companies to raise money so they can finance their operations and grow.
In an IPO, the company, in this case Snap Inc. (NYSE: SNAP), hires an investment bank to help with the logistics, to bring their shares to the public market. The firm buys the shares from the company and then distributes the shares to investors.
Having said that, unless you already have an account (250K+) with Morgan Stanley or Goldman Sachs, who are the lead bankers for this deal, it is going to be very difficult for you to buy at the IPO price. Why? Brokers like to give their best clients first dibs because it’s easier to allocate more shares to one big investor rather than to a thousand small ones. Make sense?
“So if the goal of investing is to buy low and sell high, then investing in IPO’s should be a piece of cake, right? I can just buy every IPO and then I’ll be filthy rich!”
Not exactly… 😏 It is not uncommon for companies to go public and then months later go into bankruptcy, like what happened to a bunch of companies during the Dot-com bubble in the late 90's. Remember that sock puppet on all the pets.com commercials? Yea, neither do I — nine months later, the company disappeared.
Back to the question… No, I don’t recommend my clients to buy IPO’s. Period. Buying stocks require a lot of homework and they can be incredibly risky. The problem is that IPO’s have no trading history and their private valuations can be questionable. It’s hard to tell whether they’re overpriced or not. Especially if a company is in a hot, emerging industry, like how the Dot-com boom was and how the social media craze is today. There are going to be a lot of #hypebeasts getting involved.
In my opinion, the safest time to buy an IPO is when the stock has been trading for at least one month AFTER it’s IPO date, or preferably even after its first quarterly earnings report has been released. At that point, you will have more data to help you make an educated decision, rather than just speculate your hard earned money.
Even then, nothing is guaranteed. Take it from someone who learned the hard way. I passed on the $TWTR IPO and waited 3 months before I jumped in and bought shares @52.00. Since then, I have been watching it trade all the way down to where it is now, @16 and some change.
Listen, if it truly is a great company, it will continue to go up. Buying at the bottom or selling at the top is not necessarily the only way to make money; majority of the money is made in between.
Disclaimer: Nothing on this blog should ever be considered to be advice, research or an invitation to buy or sell securities