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March 9th, 2017 under West Texas Talk » West Texas Talk Highlight

Oh, Snap!

By TOM JACOBS

col money manSnap, the company who brought us the Snapchat disappearing photo app, had its IPO – initial public offering of stock – a week ago, today, and now the public may purchase its stock. The stock was priced at $17 a share at IPO but the first share traded at $24, a 41% increase. The stock market is an auction, so we know that demand was so strong that no one was willing to sell to a buyer below $24. Wow. Since that time, it’s zoomed as high as $29.44 and closed Tuesday at $21.44. The stock market values Snap at $24 billion, which is the number of shares of stock it has times its stock price. Founders Evan Spiegel, 26, and Bobby Murphy, 28, each sold 16 million shares in the IPO, pulling in $272 million apiece. Each happy boy owns remaining shares worth over $4 billion.

That’s the info that grabs eyeballs, but it’s not the way your sober Money Man examines the situation. (Nay nay, I would never envy those with such wealth. Just as I never look both ways when crossing the street.) Rather, what’s it to us, right? Should we buy Snap stock? It depends on appetite for risk, where risk” means “risk of losing all our money permanently.” NOTE: Snap is high risk.

First, the product, a disappearing photo app (Snap is going more, but this is its most well-known use). If you can figure out how to use Snapchat easily, then according to our nephew, you are not its intended audience. I know this, because I have tried. Apparently, it’s useful for teenagers to send pix of something that rhymes with it. The business model is to generate cash through ads placed on the app, as it is with Google and Facebook. But you can find all about Snap on the interwebs. So, I’ll try to contribute something you won’t read. Handle with care.

Short answer: We should not buy shares of Snap. An IPO is not to benefit you and me, but, see “billions” above, a time for company founders and its pre-IPO investors to cash in. And when would you sell? When others will pay you the most. That would make buyers, almost always, the suckers.

Typically, a newly-public company has a history where many people and institutions have invested in it. This includes the Silicon Valley venture capitalist (“VC”), who is used to spreading her best around 100 companies, knowing that 1 or 2 will be a Google or Facebook and shower investors with gazillions (Picture Scrooge McDuck doing the backstroke in his pool of gold coins). VC contracts include a clause requiring a “liquidity event.” That is, something to make their stock saleable – “liquid.” VCs aren’t interested in owning something forever. They invest in highly risky businesses early on for that one in a million chance to win the lottery, and they want to get paid at some point if it works. Typically, this means an IPO within, say, 10 years.

This is why the IPO happens when everyone who already invested can get a great deal – sell their shares for big money – helped by investment banks who peddle the stock with superlatives to institutional buyers. The IPO is management’s and investors’ payday, not ours. So, you may imagine that your Money Man, who is a cheapskate, would not buy a company at the IPO, unless it were selling the greatest thing since sliced bread, or at least since gummi bears.

Snap has revenues but is still burning through cash – spending far more than it takes in. That cannot continue forever, but Snap has tons of money VCs have paid it before. It’s not Facebook, whose revenues, cash profits and stock have ballooned since its IPO. Snap is a complete speculation. If you’ve got money to gamble with, you might buy some Snap. But in general, the IPO is for speculators, who gamble on price, not investors, who evaluate businesses for their profits, valuation, and prospects.

Tom Jacobs is the Marfa-based fee-only Investment Advisor and Portfolio Manager of Huckleberry Capital Management, serving clients of all ages and means in 20 states and three foreign countries from offices in Marfa, Eugene, OR, Silicon Valley, and San Francisco. You may contact him for an informal and free consultation at tom@investhuckleberry.com and 432-386-0488. He doesn’t bite.

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