It made me sick to my stomach to read the stories about millennials buying the stock of Snap (SNAP) when it came public. Yes, I am a big believer in owning stocks of products you know, but only after you have done your homework.
Had you done your homework, you would have noticed that the company has no plans to make money for years, that the rate of growth is slowing, that it owes $400 million each year to Action Alerts PLUS charity portfolio holding Google (GOOGL) for data center help and that it is a very unproven advertising medium.
Now, it is true that younger people love Snap. It had taken that demographic by storm and, until this past summer when Facebook (FB) came up with a competing product, Instagram Stories, had threatened the online behemoth with is fun messaging and incredible user time, averaging 18 checks a day.
You would think that any advertiser would want to be in Snap. And that has proven to be the case, as it is known as a must-buy right now in the ad industry.
My problem has always been with my youngest daughter, who turned me on to Snap. She loves it, but has never clicked on an ad because, as she said it, "no one clicks on an ad in Snapbook. It's a silly site you go onto for seconds and nothing more."
Of course, the advertisers don't know. They will give it a try because they are told to and will do so until it either doesn't work, or the company's stock really plummets and the lemmings that push these things will walk away.
There are two ways that this scenario could change and Snap, at one point, will be a buy. First, it might reinvent itself as a place to watch short videos that can be advertised against and second, a gigantic amount of ad money could move online, not unlike what Domino's (DPZ) has done, and it will be a beneficiary, although Patrick Doyle was pretty circumspect last night when I asked him whether he would use Snap to sell pizza. I found myself thinking "why not just say yes, if you are going to use it," but I sure didn't hear that endorsement.
Now, some wags on Twitter were saying "Jim, why did you pump Twitter (TWTR) up saying it would go to $40 billion in valuation before it would roll over?" I have to laugh that anyone would criticize me about this, because it went to $40 billion and then, exactly there, rolled over. Good call!
More important, what I knew was how the process worked. Willing institutions who agreed to hold the stock and not flip it got stock at $17 on the deal and then bought more stock at the $24 opening to get a good average. But once the stock hit $28 I am sure that the syndicate desks were willing to look the other way if any of these funds wanted to sell it, given how overvalued it was vs. all of the other stocks in its universe. No syndicate desk can force a fund to lose money, which they are beginning to do on their after-market buying.
I just feel terrible about how the younger, new to the market buyers must think right now: that the process is a rip-off, that they were gaffed, whatever. The simple fact is that when you restricted a big deal to just 200 million shares for the public and you force it to be hot by restricting the ownership so tightly, you are going to get people who would be picked off, because the process per se can't value the merchandise right. Only after an IPO is seasoned, which takes months and months and often doesn't happen until insider stock is released from a lock-up, can the valuation stand up to close scrutiny.
These kids bought it wrong. Now let's hope a whole new generation isn't turned off owning single stocks along with their S&P 500 index funds that they should have been in all along.