Snap Highlights the Risk of Jumping Into Fresh IPOs

By Motley Fool Staff Markets Fool.com

It's been a bumpy ride since Snap (NYSE: SNAP)went public. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss the direction of the business, and how the companies troubles aren't all that unique when you look back at big tech IPOs.

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A full transcript follows the video.

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This video was recorded on May 12, 2017.

Dylan Lewis: A lot of the comments from management seem to strike that tone with me, too.Acouple in particular that really stood out -- one from Spiegel, "We'rekind of famous fornot givingguidance on product pipeline." Wetalk about transparency and having shareholders'best interest in mind, therewasn't any guidance anywhere. We didn't really get much in terms of product, wedidn't get much in terms of financial guidance. I understand that it's a high-growth business, andit's obviously going to take some time to settle out. I think we were bound to have a big reaction either way to the results, because no one knew what to expect, really. But, it feels a lot likethis is a company being run bySpiegel and Murphythathave all the controls anddon't have to answer to anybody, andthat's because they don't. That'sexactly what this is. The way it's all set up,they can do whatever they want.

Evan Niu:Yeah. The wholevoting structure, it'svery literally saying, "Wewant your money but not your opinion."[laughs] Andthat's never good, in any context. Just to touch on what you're saying, his comments on the call had this air ofarrogance, like, "Oh,we don't care." Of course,they don't want to give any hints aboutwhat they have in the product,because they don't want Facebook to copy them,[laughs] of course, until they release it, and thenFacebook will just copy them later. But, yeah, they came off asvery smug and arrogant,despite the fact that investors areclearly not impressed. I think heading into the results, the chances of the stock jumping were very remote, because of the valuation. There'sso muchpriced into the valuation at the IPO, which we'vetalked about on previous shows. The bar is very high already. Any small miss, you'regoing to get punished for. They missed quite a bit on several fronts. So,it's not really surprising to me that the stock droppedas much as it did, because there's no way it could have lived up to the valuation.

Lewis:In fairness, this issomething we've seen time and time again. This happened with Twitter, this happened with Facebook. Alot of expectations coming out of the IPO, and then the next morning wake-up where you're like, "Oh, we need to run a real business here that's making money and put up solid numbersquarter to quarter." I think this ispart of the reason why,even if you do think Snap is a long-term stock that you want to own, you want to buy --or really, for that matter, any recently public stock -- it mightmake sense to wait a few quarters and seehow the numbers shake out first. Becausemanagement knows a lot more than you do when it's time to go public, in terms of thetrajectory of the business. And also, when you're pre-monetization the way that Snap was, you'renot exactly sure what thoserevenue streams are going to look like, or what the final business is really going to become.

Niu:Exactly. Thatsupports my theory that they'rejust trying to cash out. Some people argue that they went publicprematurely relative to --usually, you want to have somemore solid financial numbersbefore you go public. They were just now starting to grow the ad business,which is why the growth rate in the first quarter was so huge, because they'recoming off such a tiny base. So, there was some concern, like, why are they going public now, versuswaiting until they have some better results in their track record? Which, of course, makes it better to justify to investors. But, I think the whole thing is, they just want to cash out as soon as they can, and get rich.

Lewis:Yeah. Insome ways, I can't blame them, right?

Dylan Lewis owns shares of FB. Evan Niu, CFA owns shares of FB. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends FB and TWTR. The Motley Fool has a disclosure policy.