Why We Invested in Snapchat BEFORE It Went Public

I could see this coming a mile away…

Snapchat is already catching flak.

Its parent company, Snap, IPO’d less than a week ago.

Founded in 2011, Snapchat is the photo-disappearing social media company with 158 million users who are typically between the ages of 18 and 24.

Its IPO was the biggest tech IPO since Alibaba’s in 2014 and the biggest American tech IPO since Facebook’s in 2012.

Not one broker among the eight following the company has a buy. Most have sells…

Snap’s Disappointing Ratings

Based on ratings as of March 6, five out of seven firms say Snap is a “Sell.”

The first day, its shares rose by more than 51% at their peak. The second day, they went up again. Since then, it’s been more down than up.

Boy, am I NOT surprised.

Apart from the pessimistic ratings, here are some reasons why…

  • Snap has never made a profit.
  • It’s going up against some tough competition with Facebook/Instagram and YouTube.
  • Its user growth slowed in the past two quarters.

I could go on, but I’ll stop right here.


The Makings of a Future Social Media Powerhouse

Investors aren’t (or shouldn’t be) betting on Snap’s past or current performance.

They’re investing with a long-term view of Snap’s potential to develop into a future social media titan. 

And nothing that has happened in the past week has made that future one iota less likely. Snap is absolutely dripping with upside.

It’s by far the best equipped social media company to reach out to the millennial generation.

This also happens to be the demographic that is watching less TV. Snap plans to recreate TV ads on mobile and grab a large chunk of the huge and growing TV ad budget.

In the U.S. alone, TV ads total more than $70 billion, says eMarketer. Worldwide, it was $652 billion in 2016. Snap states (in its S-1) that mobile advertising is its fastest-growing segment. It’s expected to grow 3X from $66 billion in 2016 to $196 billion in 2020.

This huge market is there for the taking. Snap has the product, plan and leadership to make it happen.

That doesn’t mean it’s a “gimme.” But I’m a big believer in Snap’s future. And yet…

I wouldn’t recommend its shares to my readers – not at this point in time. The stock is all over the place.

It’ll probably be another six months to a year before it calms down. The investment simply carries too much risk right now. Consider that the person who bought shares on its IPO day at $25 is already in the red by 12%.

The Winners: Pre-IPO Investors in Snap

Fortunately, I don’t have to worry about when and if to recommend Snap.

I already did it – before its IPO.

Last September, we invited our premium members to invest in a pre-IPO fund we arranged.

One of the first companies we added to the fund? Snap.

We got our shares for $15.36. At today’s price of $21.80, we’re sitting on a 42% profit. For every $10,000 worth of shares bought, investors gained $4,200.

Only the well-connected institutions could pre-buy the 145 million shares made available to them at the IPO price of $17.

This “privileged” bunch reaped a $1.1 billion windfall by the end of IPO day – shares went up 44% that day.

For everybody else, investing on IPO day is inherently risky. They’re forced to ride a roller coaster of share prices zooming up and down.

Depending on what time of day they got in, they could be in the black or in the red.

But at no time that day were prices available at below $17. Everyday investors AND connected institutions missed out on the far better way to make an investment in exciting startups intending to IPO soon.

That so-called “privilege” went only to pre-IPO investors.

These early investors got shares one of two ways: They bought directly from Snap when it issued new shares during one of its fundraising rounds, or they bought shares on the secondary market from shareowners, which is how we did it.

When you invest directly, you have to write out a check for $1 million or more to join a venture capital fund that’s investing in the company.

To participate in our deal, you had to write a check for $10,000. It’s a pretty sweet deal. And you get exposure to more than a half-dozen other high-flying late-stage startups whose IPOs are expected soon.

As I said in the last post I wrote about Snapchat (some three years ago), “Hyped-up IPOs aren’t tremendous wealth-creating events. The time to invest is in early-stage companies before media attention revs up.”

Invest early and well,

Andy Gordon
Founder, Early Investing