You see, IPOs are just get-rich-quick schemes for investment banks and institutional investors. These investment banks and large institutions are able to buy shares at the offer price.
Retail investors don’t get in at the offer price. Instead, we have to wait until the higher “open price.”
Because these big banks and large institutions need the price to be bid up in order to make a profit, analysts (who work at these banks) rate the new stock very favorably. This entices people to buy the stock at an inflated price. Once the excitement vanishes (and the big banks and institutions cash out), the stock price drops.
“The thought that any sane investor would buy Snapchat is frightening,” said Money Morning Capital Wave Strategist Shah Gilani. “Buying shares in SNAP is like trying to pick up nickels in front of buses.”
After all, this is a company that admitted it might never make money when it filed for its IPO.
SNAP Stock Likely to Drop Again on Aug. 14
Part of the downward pressure on Snap stock is that the lock-up period is ending. The lock-up period is the set time that early investors and insiders cannot trade their shares of the stock.
Fitz-Gerald recommends waiting until the lock-up period ends before you invest in any IPO. That way, you will be able to see how the market reacts to the stock once the price support is removed. But he still recommends avoiding Snapchat all together.
Monday, the lock-up period expired for 400 million shares. SNAP stock dropped as much as 5% in intraday trading as a result.
But Monday wasn’t the end of the lock-up period for all of the shares held by insiders and early investors. On Aug. 14, another 782 million shares will be eligible to begin trading.
Combine the expiring lock-up period with the next earnings report, and we expect to see the stock continue its decline.
To be clear, this is not a “buy the dip” stock. There is still too much volatility for us to recommend it. Instead, we recommend buying Facebook Inc. (Nasdaq: FB).
Facebook stock has gained 47.64% so far this year. The consensus one-year price target of the 39 analysts that follow FB is $187.59, for a gain of 10% in the next year.
Unlike Snapchat, FB is expected to make money this quarter. Analysts expect the company to report EPS of $1.26 on revenue of $9.79 billion.
Last quarter, Facebook had 1.3 billion DAUs, according to Statista. That’s seven times the DAUs that Snap reported last quarter.
Overall, Facebook is a much better investment than Snapchat.
The Bottom Line: Analysts may be bullish on Snapchat stock, but we are not. In fact, we think the volatility and downward pressure on the stock will continue. Instead of buying SNAP, invest in FB.
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