All of you born after the late 1980’s are probably wondering what a Gremlin is. Here is a definition of gremlin by yours truly, “A gremlin is a short-sited creature who reproduces rapidly when it encounters water, or around the time of an IPO.”
So, are you that person I spoke with back in May, 2012? You know, the one who was all psyched up about the Facebook IPO. There were a lot of you. You were running around like little gremlins in a typhoon just replicating each passing day for the weeks leading up to the IPO date. It was madness.
Related: IPO -Understanding How Stocks Are Born.
Before the Facebook IPO, you didn’t pay much attention to investing, but you knew a brand called Facebook, and you thought you should get in on the action. There was, however, a slight problem with that action. When you purchase a stock, you are purchasing it for a price. You are making a judgment about how much you think that company is worth. When you purchased your Facebook stock after the IPO for about $38 per share, and it dipped down under $20 per share, then sat in the $20 per share level a few months, you were a little freaked out. Especially considering your $38 was valuing the company at around $100 billion but a few months later was only valued at less than $50 billion. That’s like purchasing you home for $300,000 and a few months into living there your home is worth $150,000.
Low and behold, today, if you actually kept your Facebook stock after it decreased over 50% (most of you didn’t) your shares would be worth $136 today. The total gain would be 257%, or over the roughly 58 months since the IPO, you would have an annual rate of return of around 30%.
Let’s take a look at the Twitter IPO. Twitter’s IPO was November 6, 2013. It opened the day of its IPO at $26 per share and it closed the day at $44.90. Let’s say you got in Twitter around the time of the IPO; we will go with $45 per share. By January it was over $60 per share. Wow, you are such a genius investor. In less than three months you gained 33%. This is when the arrogance of the speculator sets in and you feel invincible, ingenious, confident. Again, you purchased Twitter at a price, and that particular price put a value of around $24 billion for the company.
Today, Twitter sits at less than $16 per share. Your $24 billion company is now worth less than $12 billion. You are now a depressed little Twitter IPO Gremlin, considering you are down 64%.
As you can see from Facebook and Twitter, two drastically different outcomes from two huge IPOs. And here we have the Snapchat IPO. What is Snapchat going to be? Is it going to be a Facebook? Is it going to be a Twitter? It’s currently not making a profit. This isn’t abnormal for a tech company, but adds the speculative nature of this IPO. Its revenue per customer has increased drastically over the past year, but their costs have as well. The vast majority of their revenue is from advertising, which isn’t surprising for a company like Snapchat.
Snapchat IPO’d at $17 per share and closed the day at $24.53. Guess what the market is valuing this company at? Any takers? Do you think it’s valued at a higher value than Facebook when it launched? Do you think it’s a lower value than Twitter when it launched? Well guess what, it’s higher than Twitter but lower than Facebook. Coming in at a cool $28.4 billion. Not bad for a profit generating machine like Snapchat. Oh, wait, I mean a profitless generating machine like snapchat. I guess they have figured out how to take pictures and burn cash in the process. So maybe that’s worth something?
What if you wait?
Instead of jumping on the bandwagon, what if you were in that very small minority of investors who just patiently waited? What if you waited for one year to see how things go? If you waited 1 year to invest in the Facebook IPO, on May 20th 2013, you could have bought it at $25.76. Instead of purchasing it after the IPO at $38. Instead of the 256% you would have gained to date, you would have gained 428% to date.
If you waited a year after the Twitter IPO to purchase the stock instead of buying it directly after the IPO, you would have purchased the stock for $40.84. Instead of having a loss of 64% you would have a loss of around 60%. Whohoo! 4 percentage points better!
I’m not saying that you will do better just waiting one year after an IPO to invest in the company. I’m just saying there is no problem with waiting in general. Waiting and patience is the direct problem facing investors; they don’t want to wait because they are emotional.
The IPO Problem
The problem with the IPO is that for companies like Facebook, Twitter, and Snapchat, it’s straight up, unquestionable, speculation. Technology is ever changing, and tomorrow you may have an Instachat and then we will have Chatogram and then we will have Lapchat (selfie pictures only of cute animals sitting on your lap). You get the picture. Snapchat is a guess. Throw a dart. You don’t know. There is no way to know. Get your magic 8-ball out.
What about things like brand loyalty? Think of why Apple is valued so high with its crazy brand loyalty. Does Snapchat have any brand loyalty? I’m pretty sure my recently made-up Lapchat could potentially steal significant market share from them over the next two years.
We basically have no idea what will happen, and guess what, you shouldn’t care. Do you know there are over 3,000 other stocks you can invest in JUST on the New York Stock Exchange? Are you aware of the fact that you only want to invest in this IPO because you are a gremlin? Because you happen to be familiar with the brand. Because your friends are into it.
Here is my advice to you. Go to sleep tonight and think about the fact that there are 3,000 other companies just in the NYSE that you can invest in. Then think about the fact that you only care about the Snapchat IPO because it is a company you have heard of, and it’s shiny, and it’s new on the stock exchange. Then, after you realize these things, invest in something that has some actual history of profits and brand loyalty. Oh, and don’t be a gremlin.