WBIR: Oh, snap! Within an hour of Snap, Inc.’s first public trading on the New York Stock Exchange last Thursday, the company’s stock price had already soared 50%. But what exactly is an “IPO” and how will it change the future of popular mobile app, Snapchat?
PAUL, LET’S START WITH THE BASICS, WHAT IS AN IPO?
An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity.
WHY DO COMPANIES GO TO PUBLIC OWNERSHIP?
- Seeking to expand their business.
- Public companies can usually get better rates when they issue debt.
- Mergers and acquisitions are easier to do because stock can be issued as part of the deal.
- Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.
TELL US MORE ABOUT SNAP’S METEORIC START…
- Snap Inc., parent of Snapchat
- Snap’s IPO stock sale brought in $3.4b.
- Launched just five years ago in a Stanford University dorm. Its founders are now overnight billionaires.
- Snap closed up 44% from its offer price of $17 (+9 billion on the first day of trading)
- Limited shares were available and only about 15% available to regular investors.
HOW FINANCIALLY STRONG IS THE COMPANY?
- Social media companies are unpredictable and prone to rapid rises and falls.
- Snap had net loss of over $514 million in 2016; and, a net loss of $372 million in 2015.
- Concerns: Slow user growth.
- Fickle consumer base: Ages 13-24 fickle.
SO INVESTING IN SNAP SOUNDS LIKE A HIGHER RISK BET…
IPO investing is not for the faint of heart. Snap clearly hopes to be the next Facebook but it may be like a sputtering Twitter. At a minimum,
- Investors should wait until Snap falls in share value after the initial IPO buzz wears off.
- Only invest money that you can afford to lose.
Next? Airbnb or Uber IPOs predicted in 2017.