This week we’ve written to you about interest rates, economic data, resources and property. And today I’m talking about none of that.
We’re taking a hard right turn, to point out one of the most important aspects of investing. In fact if you’re able to master this key part of buying and selling shares, you’ll do very well long term.
If you don’t know how to master this, then you’re in for a bumpy ride. Over my time I’ve seen plenty of money won and lost. The winners are able to control and master this trick. The losers simply get swept away with it, unable to do what’s necessary.
Now you have to ask yourself, can you control your emotion?
Snap Inc. [NASDAQ:SNAP] case in point
Today is one of those days that the mainstream will look back on and analyse to death. Today was the day that ‘the biggest IPO of 2017’ hit the market.
Today, Snap Inc started trading on the NASDAQ. Snap Inc is the company that owns social media messaging app, Snapchat. Snapchat is one of those incredible growth stories of the modern era.
Founded in 2011, it has grown to become one of the western world’s most used social media apps. Their daily active users are around 158 million people. They have around 301 monthly active users.
They made $404.5 million in revenue in 2016. This was up from $58.7 million in 2015. Incredible growth. However…
In 2015 the company made a loss of US$372.9 million. And in 2016 that loss widened to $514.6 million.
Let’s repeat that again. Last year, this six year old company on $404.5 million in revenue lost more than half a billion US dollars.
HALF A BILLION US DOLLARS IN LOSSES.
I’m sorry for shouting, but I have to. You see, today when Snap Inc began trading the stock shot up as high as US$26. This was 52% higher than their listing price of US$17.
They closed at US$24.48, a 44% rise. That puts their market cap at just over US$28 billion.
Make no mistake, the only reason for this rise was hype. It certainly wasn’t much else. The mainstream media has been covering this for over a year, from when the idea of an IPO was just a rumour. As I said earlier, many outlets were calling this the most anticipated IPO of 2017.
This build-up of hype over the last few months has made the IPO larger than life. Here you have a young, billionaire founder with supermodel girlfriend in tow listing his social media company on the NASDAQ. It’s a Hollywood story if I’ve ever seen one.
I can almost guarantee many investors will have turned to their millennial children and asked, ‘What’s this Snapchat thing? Should we buy some shares in it?’
And the kids would probably say, ‘Yes, Snapchat is amazing, definitely buy it.’ And hence decisions were made. The hype also extended to the idea that Snapchat could indeed become the next Facebook.
And now with today’s success, it’s likely others will follow suit. Two in particular, Spotify and Pinterest, are the most likely.
But let’s just calm down a moment. The reason this IPO is so strong is because everyone knows about it. What a lot of people don’t know is the company, their losses, their revenue, their potential revenue, and the competition they’re now facing.
And will they be the next Facebook? No. They won’t. Will investors who got caught up in today’s hype get burnt? Yes they probably will. And those who managed to tap out today for a tidy little profit by controlling their emotions will probably be laughing all the way.
Not the next Facebook, probably the next Twitter
What you’re seeing with Snap is exactly what happened when Twitter launched their IPO in 2013. Twitter’s IPO price was US$26. On their opening day the stock rose almost 73% higher.
The headline on CNN was, ‘#WOW! Twitter soars 73% in IPO’.
Twitter’s monthly active users at the time were around 231 million people. They too had seen incredible growth from their founding. And shortly after the IPO, the mainstream hyped up Twitter so much they blew the stock even higher.
By the start of 2014 Twitter was trading up around US$70. Today Twitter trades at US$15.79. Why?
Well Twitter’s user numbers have been tapering off. They also haven’t really figured out a way to properly monetise the company. In short it’s a fantastic communications app, but it’s not the best business in the world.
Plenty of people in 2014 would have bought Twitter at its peak believing this was going to be the next great tech stock. But in all reality Twitter is just a messaging app. They simply don’t do much else.
Those who were rational, calm and emotionless when trading Twitter would have seen this from the start. And when emotion and hype from uncontrollable investors pushed the price higher, the smart money got out.
And then down it went.
Look at Snapchat for what it really is. It is a brilliant communications app. And yes they are now making physical products like camera glasses (that look a bit naff if you ask me). There’s rumour they might be making a drone too.
But really, what more is there in store for the company? Can they properly monetise the company without bastardising its origins? The whole premise of it was to send a message, a snap, which would then disappear.
Now they need to sell advertising to make money. And I can’t see them doing it without causing user numbers to taper off. And then other new messaging apps will come along in its place and appeal to the next generation of young people.
Mobile messaging is a fickle market, driven on hype. The stock price of these companies is also driven on hype — to start with. And when rational thought gets the better of people, the stock inevitably tumbles.
Not every social media start up is ‘the next Facebook’, and Snap Inc certainly isn’t. They’re a perfect example of a popular stock driven on hype and little else.
It might even go higher in the coming days. It might double in price. But the way I see it, people will be able to snap it up for a bargain in a few months’ time. But even then, it still might not be worth it.
Take this as a lesson. You can ride hype, but you must control your emotion when investing. If you can master that, then you’ll know when it’s time to get out of a stock, and when it’s time to avoid one.
From the Port Phillip Publishing Library