Here Are The Reasons Why You Should Avoid Buying The Snap IPO


If you have been paying attention to the high level of excitement that surrounds the impending Snap Inc. IPO, you will probably conclude that it is destined to make a big wave when its stocks finally hit the market.

The other narrative, however, is that the level of interest is just all hype, which means the IPO could possibly turn to be a dud. Before you dismiss this line as nonsense or if you are really fired up to snap up a bunch of shares, you should note that the market interest at this point might not translate into better market performance and that is somehow supported by the experiences of similar mega IPOs, particularly those coming from the technology industry.

Tales From Previous Tech Mega IPOs

You are probably not aware that Facebook, Twitter, Zynga, and Groupon all enjoyed massive hype when they first went public. The expectations for their respective IPOs were through the roof and shares have been sold at high opening stock prices. After their first fiscal years, however, prices began tumbling down, resulting in up to an 86 percent difference.

A year after its market debut, for example, Twitter was being traded for $40.31, which sustained a 10.6 percent drop from its opening price. Groupon was hardest hit, suffering a -86.1 percent change.

Of course, you will say that Facebook is enjoying robust market performance today. But there is still the fact that its opening $42.05 stock price dropped a little more than 37 percent a year after going public.

The lesson here is for investors to treat the hubbub entailed in Snap's initial public offering with caution because this mega IPO is not the first to have been accorded such interest. Experts even coined a category for these: "sexy companies" but bad investments.

Non-Voting Snap Stock

It is also helpful to look at Snap as an organization post IPO. Some analysts are already focusing on this area especially with the way the company is being branded as an experiment in corporate governance. Some have balked at the manner in which Snap's shareholders are not entitled to any voting rights. Simply put, there will be a number of trial and errors along the way for this new kind of organization and the shareholders will be powerless to do anything about it.

A recent report revealed how one institutional investor complained to Snap that they have "a Banana Republic-style approach."

In its IPO filing, Snap has acknowledged this, confirming that it will be the first company to trade non-voting stocks in the United States. It appears that Snap's management wants to take money from investors without offering equitable benefits save for profit if it manages to be successful. Even Google's owners, who wanted to exert control over the company when it went public, had to create a stock category that entails some rights for shareholders to have a say on how the organization is run.

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