Should Investors Wait Until After the IPO to Get in on Snapchat?

By Daisy Maxey IPOs Dow Jones Newswires

FILE PHOTO: The logo of messaging app Snapchat is seen at a booth at TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. To match Analysis SNAP-IPO/HARDWARE REUTERS/Lucy Nicholson/File Photo (Copyright Reuters 2017)

When clients ask financial adviser Michael Busch about buying shares in Snap Inc.'s initial public offering this week, he warns them to consider it a speculative play. 

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Mr. Busch, president of Vogel Financial Advisors in Dallas, says he tells clients they would be buying a company that's currently losing money and facing competition from several technology behemoths with significant resources, including Facebook Inc., Google parent Alphabet Inc. and Apple Inc. As such, he is advising clients to limit any investment in Snap to an amount they're comfortable losing. 

Still, he says he's going to try to get some shares of the popular social-media company at the offering price to satisfy some eager investors -- though he knows it will likely be difficult because of investor demand. "Whatever we request, we probably won't get the full allocation," says Mr. Busch, whose firm manages more than $300 million. 

Snap may be the next big thing, financial advisers say, but to them its IPO raises familiar risks: Investors are clamoring to get in on an unproven company whose founders and backers will likely be the biggest winners. These financial advisers -- who unlike brokers at the banks underwriting the offering don't have ready access to or a vested interest in pitching shares -- are therefore generally advising clients to wait and see before buying in. 

The Venice, Calif.-based company is set to debut this week on the New York Stock Exchange under the ticker symbol SNAP. The shares are expected to price Wednesday after the close and begin trading Thursday. The company recently said it aimed to sell shares around $14 to $16 a share, which would make for a valuation of $19.5 billion to $22.2 billion on the company. 

The five-year-old company lost $514.6 million in 2016, nearly 38% more than it lost in 2015, as it spent heavily on marketing, research and data storage. But Snap is growing quickly, posting revenue last year of $404.5 million, more than six times its 2015 revenue, according to recent regulatory filings. The company reported 158 million daily active users on average in the fourth quarter, the majority of them in the youthful cohort coveted by advertisers. 

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At Miracle Mile Advisors in Los Angeles, financial adviser Brian Sterz says a lot of clients are expressing interest in the IPO but he won't be buying shares, instead hoping to get in if the shares sell off some. 

He says he believes Snap is in better shape than its losses would suggest. "They have a huge growth trajectory," says Mr. Sterz, who says his firm manages $740 million. "Yes, they are losing money, but many young companies, particularly tech companies, are not profitable for a number of years." 

"While the popular investor portrayals of Snap's stock are deciding if it is the next Twitter or the next Facebook," Mr. Sterz says, referring to the divergent performance of the two stocks in the years since their market debuts, "many are overlooking the fact that Snap is the dominant communication app among 13- to 28-year-olds, advertisers' most valuable target segment." 

Another risk factor some advisers are warning about: Snap's nonvoting-share structure. Co-founders Evan Spiegel and Bobby Murphy together hold about 89% of the voting shares, Snap has disclosed. Investors won't get any voting power with shares they purchase in the IPO. 

Laila Pence, president at Pence Wealth Management in Newport Beach, Calif., says she considers this share structure a negative. She generally doesn't like IPOs as an investment, but especially dislikes hot IPOs like this one. 

Ms. Pence says a few clients have asked about buying shares, but she's advised them against it. 

"We're a bit worried that it might act like Twitter," says Ms. Pence whose firm manages $1 billion. Twitter's shares closed Friday at $15.98, far below their IPO price of $26 a share. "We would rather wait until after the IPO and see what it does before we consider putting any clients into it." 

But Mr. Sterz notes that both Facebook and Google have made changes to their share structures, further entrenching their founders. Facebook went public in 2012 with a dual-class share structure, and last year said it would create a new class of nonvoting stock to allow Chief Executive Mark Zuckerberg to maintain control. In 2014, Google added a new class of nonvoting shares. 

"It's a concern whenever there's limited voting rights, and this is to an extreme, but it's nothing new," says Mr. Sterz. "All of these companies are dependent on the actions of management, and as a shareholder, you are betting on management so the structure isn't an indication of whether things will do well or won't do well. Facebook and Google have both done exceptionally well." 

Elyse Foster, owner of Harbor Financial Group in Boulder, Colo., is requesting allocations to Snap's offering for some clients through her custodian, Schwab Institutional. But she's warning investors that the shares will likely be difficult to get and encouraging them to temper their expectations. 

She warns that those who hope to turn the shares around quickly for a profit may be disappointed as many shares slump after the initial-offering euphoria wears off. 

Ms. Foster, whose firm manages $152 million, says most of her clients who want to buy Snap are interested in doing so after the shares have traded for a bit and can be evaluated. "History will tell you that it's not going to pop up in value," she says. "Often one can buy the shares at a reasonable price [after the debut] and avoid the IPO frenzy." 

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