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Thoughts on Investing in SnapChat and Other IPOs

Thoughts on Investing in SnapChat and Other IPOs

| March 07, 2017
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Snapchat (SNAP) stock was initially priced and sold to investment banks and insiders at $17/share. Then on March 2nd, Snapchat IPO’d on the public markets (the point at which the large majority of people had the opportunity to buy shares) at $24/share due to high investor demand. Its share price continued to surge above $29/share, before quickly cratering back-down to below $21/share (as of 3-7-17). Therefore, unless you were in the select group of investors with the opportunity to buy-in at $17/share, you are now most likely underwater on your Snapchat purchase.

Now, no one truly knows where Snapchat’s stock value will go from here, but below are a few examples of other IPOs we have had recently as a reference:

  • Facebook (FB): share prices crashed more than 50% over the next few months after it IPO’d (as you can see in the graph below in red). While the stock is now significantly higher than where it IPO’d, you have to ask yourself “Would I have had the confidence to stay invested in this stock as it continued to plummet for months on end? And if I had, what logic would I be basing my decision on?”

  • Twitter (TWTR): Opened on the public markets around $45/share, then quickly surged to above $69/share at one point. Since then the price has plummeted all the way down to $15/share; a 65% drop!

  • AliBaba (BABA): Opened at around $92/share, surged to above $115/share in a couple months; then dropped to as low as $59/share a year after it’s IPO, underwent significant volatility, and has finally gone back above the pre-IPO value (although it has still underperformed the S&P 500 index since opening).

  • GoPro (GPRD): One of the best examples, this stock jumped over 200% above its IPO price, but has since plummeted and is now over 71% below its IPO price.

  • FitBit (FIT): Now almost 80% below its IPO price.

  • Shake Shack (SHAK): Now almost 28% below its IPO price.

As you can see, all of these stocks have had significant volatility / risk (up and down movements), much more than the US stock market as a whole (S&P 500). Also, most of them have lost value since IPO date and the only one to actually beat the ‘market’ (S&P 500) since IPO date has been Facebook.

Our philosophy with investing in any individual stock (including a stock IPO) is that the severe lack of diversification makes this much closer to gambling than investing. A ‘gamble’ is a bet in which chance provides the primary determining factor of whether you will succeed and make money. An ‘investment’ is a bet in which the odds are significantly in your favor, as well as time.

Therefore, we highly recommend keeping any investments in individual stocks to money that you don’t mind losing, and that losing won’t materially impact achieving your long-term goals.

There are risks associated with investing in a public offering, including unproven management, and in some cases, these companies may have substantial debt. As such, they may not be appropriate for every investor. Customers should read the offering prospectus carefully, and make their own determination of whether an investment in the offering is consistent with their investment objectives, financial situation, and risk tolerance. Lincoln Financial Advisors does not offer investment advice or evaluate the merits of any individual IPO. (All stock charts included in this article were generated through Morningstar® Advisor Workstation℠)

Let us know if we you have any questions regarding investing, or creating a long-term financial plan.

Odyssey Wealth Design provides financial planning and wealth management to clients in Orange County, Irvine, Newport Beach, and around the country.

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