Will Snap (SNAP) open the gates to other companies that have been sitting on the sidelines, waiting for the moment to offer shares?
I think it should.
Let's understand that if SNAP is worth $28 billion as the stock market says it is, there are a heck of a lot of other companies with big losses and no real chance for profits that would like to get just a piece of that valuation.
Remember -- and I think I will write this in every article about SNAP -- this company is worth far more than what Action Alerts PLUS charity portfolio holding Facebook (FB) was on a price-to-sales basis: 28x vs. 19x. So I am not ever going to be able to make a case to own it, unless its revenues increase dramatically, its daily average users accelerate and its margins come up quickly.
It makes no sense as an investment unless it can rapidly make those changes. Anything's possible, but I will stand on the notion that this stock trades where it does because of the mechanics of the syndicate desk and nothing else -- you get stock at $17, you have to buy it in the after-market.
Now, not everyone took that bet. My survey of buyers indicates that 30% of the top 15 accounts chose not to play, given that they would have to come into the aftermarket to buy.
But if there is one thing for certain, it's that there has to be a more rapid adoption of online social advertising than we even have now. More advertisers have to be willing to pay for those daily average users than currently do to justify the kind of valuation SNAP has.
How badly does that have to happen?
I don't like to suggest shorts and you can't short a new red-hot deal because it isn't seasoned.
But if SNAP is to grow into its market cap, I think that the entire group must lift to the point where I would go long Twitter (TWTR) here and short SNAP, betting that even if there is more adoption the biggest winner would be Twitter, not SNAP.
Everyone hates Twitter now at $11 billion, almost exactly half what it was for sale for in October. SNAP's loved at $28 billion.
While I understand that Twitter will have a bad quarter and I am sure that SNAP will have a good one, I just think that the adoption rate for advertisers is the driving force. So the paid trade is what makes sense if SNAP stays here and can be shorted -- usually one month in is the timeframe where you won't get hung.
Why do you want to be careful about this type of shorting? Take a look at Acacia Communications (ACIA) and Twilio (TWLO) . Both companies are pretty good, although the former has been inconsistent in earnings of late.
Both stocks got off to hot starts; too hot.
Both attracted intense short selling. The shorts almost wrecked their years, until secondaries were done to alleviate the tightness.
For all I know, the holders who took down SNAP yesterday aren't going anywhere, so it might be a difficult short.
So you have to wait.
But let's be clear, if more deals come, as is the presumption from the success of SNAP, and you don't get more advertising and daily user adoption, a long Twitter short SNAP may be the best way to play the resurgence in IPOs and social media.
Oh, and to be sure, SNAP can't be taken over. Its stock is a call on nothing.
Twitter? It was for sale once; it can be for sale again in a few months, after the short swing rules come into play -- don't forget Jack Dorsey just bought $7 million dollars' worth of stock.
So if Twitter gets its act together after this bad quarter next, and ad dollars keep flowing into the space, the trade should work, and is probably worth doing.
