For The Market, This $30 Billion IPO Was a Snap

What’s an investor to do with Snap (NYSE: SNAP)? Unless you were one of the blessed investors to receive an allocation of shares at the $17 IPO price, it’s a tough question. The stock is too expensive to buy, but much too dangerous to short.

Analysts have been scratching their heads trying to figure out the best route to valuing Snap. Financial rags have been trashing the IPO ever since word started to leak out regarding its mushrooming losses and possible $30 billion valuation. Yet the deal was oversubscribed multiple times, priced one dollar above its $14-$16 original range and opened up 40% from the IPO price.

Instead of risking your hard-earned dollars buying Snap at these levels or finding a way to justify the 25%-30% interest you’d pay to borrow the stock to short it, maybe the most important lesson is that only a healthy market treats a frothy IPO so kindly. The market digested the Snap IPO quite well. It was, you might say, a snap.

Compare this to the Facebook (NSDQ: FB) IPO, which was significantly larger and priced amid a market decline. The stock eventually dropped 50% and the market sputtered.

The Snap deal was the biggest of the year, with 200 million shares sold at $17 for a total price of $34 billion of stock sold. Yet it paled in comparison to the Facebook IPO, which sold 400 million shares at $38 each for a grand total of $160 billion.

The Facebook IPO was priced at a tricky time for the market. When investment bankers were weighing possible valuations for Facebook in April 2012, the S&P 500 was up 11% year to date. But starting in May the market got messy and by the time Facebook’s deal was priced mid-May, the S&P had sacrificed most of its gains.

Year to date the S&P is up just 5% and still trending strong despite high valuations.

Add to the equation the fact that Facebook was actually earning a profit. I know it sounds perverse but profitable companies are held to different standards than unprofitable ones. Facebook rudely produced a less than hoped for profit in its first quarter as a public entity, which sent its shares spiraling down to $19.

Snap will be held to no such standard. Although the company has grown revenue a truly astounding seven-fold in one year, losses ballooned from $340 million to $500 million. The warm reception of Snap shares, which are still up 40% from the issue price even after a small pullback, shows that investors are more concerned with revenue growth than potential profit.

This investor attitude was easily predicted. With companies like Uber, Slack and Airbnb being funded generously by private equity firms, the IPO market has been left with second-rate slow growers. A simple sift through the deals priced this year shows few with revenue growth even bumping against 20%.

While teens and Millennials worldwide Snapchat their latest adventure to their coterie of friends, I’ll sit back and rest a little easier knowing investors’ hunger for growth and appetite for risk are showing no signs of slowing down.

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