You don't want to hear this. No one wants to hear this, the longs or the shorts, but you can't get caught up in valuations on an unseasoned initial public offering -- and Snap (SNAP) is the definition of an unseasoned initial public offering.
Yesterday, when the company went public with a $24 billion valuation, I said it would go to $40 billion. My partner on Squawk on the Street, David Faber, snickered and asked when. I said at the end of the day.
Okay, so I was off by a couple of hours.
I know, it seems preposterous that a money-losing company with a stock that doesn't even have any voting rights, should be worth $40 billion.
But -- as they say in "Unforgiven" -- "deserve's got nothing to do with it." The process does -- and the process, at times, tilts heavily toward overvaluation. This is one of those times.
Today the stock looked like it might do almost nothing. It was up about $0.20 when the S&P futures were downticking pretty hard.
And then we learned before the opening that Comcast (CMCSA) , the parent company of CNBC, had invested $500 million at the $17 valuation -- and that was all she wrote. The darned thing took off and never looked back.
Now the sticklers point out immediately that Snap is now trading at about 40x sales. Facebook (FB) , which was on the cusp of what turned out to be insane profitability -- as opposed to Snap's inane profligacy -- traded at 19x sales when it came public. So Snap is valued at more than twice what Facebook came public at, despite being nowhere near as good a company on any metric -- including, I bet, their own.
I think all the company's execs really wanted was to not be lumped in with Twitter (TWTR) , which sells at 4x sales now and at 13x sales when it came public -- although it quickly went to 20x sales because of all of the hoopla surrounding the company.
We know that Twitter's business peaked pretty much right after it came public. There are fears that Snap could have the same problem, as its rate of growth slowed pretty dramatically when Facebook's Instagram introduced its knockoff of Snapchat's stories feature.
So what do the buyers know here? Some are institutions that needed to buy more stock to round up their positions so they were of meaningful size to their portfolios. Others, though, including many of today's buyers, are reacting to the Comcast investment and thinking that perhaps there will be more programming and more advertisers than some expect. Still others are simply saying, "this one has momentum and I want a momentum play."
No matter what, because of the peculiar way that initial public offerings hold back stock, the 200 million shares -- not the 1.2 billion that aren't public -- are determining the valuation. As long as that is the case, you can't draw real assumptions of what the company might be worth. You get the float expanded, you get the true picture of advertising love for the average daily users, and you get what looks to be an ecosystem that perhaps makes 13-to-18-year-olds click on ads, and then -- and not until then -- do you need to think about valuation. Otherwise, I promise that you will simply be driving yourself mad trying to be rigorous about something, where rigor simply doesn't apply.
Oh and one other thing -- when you hear that Snap is more valuable than these nine companies or these 12 companies, big deal. Remember, Hyman Roth's company -- in "The Godfather Part II" -- was bigger than US Steel (X) ! (Just talking size, not morals...)