I hate social media. Period.
I realised a long time ago that life is so much better and happier WITHOUT Facebook, Twitter and Snapchat.
I know. I am in the minority perhaps.
However, you do not need to use these types of social media to have a good idea of what could happen next to their stock.
So let’s talk about Snapchat or Snap Inc. (SNAP) and it’s stock which went public last week.
Snapchat is an app where you can send a photo or video to another user – but what you send will disappear after 10 seconds forever…
So let me share with you 3 things that web and social media IPOs – like SNAP- will NOT tell you.
1. “You should probably do NOTHING when my stock is launched”.
This warning will fall on many deaf ears I have no doubt.
When Twitter (TWTR) was launched on the stock market in November 2013, I warned my subscribers that the safest thing to do was to stand aside until the dust had settled.
Twitter shares plunged after it peaked at $74. Within a few months they had dropped to $30… and now they are trading at an abysmal $15!
So at this stage, we need to stand aside and just see how the market reacts to the stock after its launch. We don’t want to be caught up in the emotions of the herd.
2. “My stock may drop by 50% in the first 5 months”
One thing we have noticed from previous examples of web IPOs such as Facebook, Linkedin, Groupon and Zynga is that their stocks all fell to at least 50% of their peaks within a year after being launched.
Take a look at this table which shows by how much each web stock dropped after its initial public offering:
As you can see, in almost every case, web IPOs have fallen by approximately 50% of their initial highs five months after their launch.
Even worse: Twitter fell by a staggering 60% of its initial highs within its first 7 months, Zynga by 49%, and Groupon fell by 92% of its initial peak after launch!
That must have hurt…
Of course, this is not an exact science and there have been exceptions such as Google which rallied after its launch. However, Google’s IPO was launched when web stocks were out of favour and at the time it did not have a cult following the same way that Twitter, Facebook and Snapchat now do.
Snapchat’s peak price so far has been nearly $30. Assuming that it may follow the historical pattern of web IPOs, that may give us a clue as to where it may be heading to in its first five months… (more about this later).
3. “The best time to buy me is after I start carving out a bottom”
The next and final stage (if the stock falls) is to wait for the stock to begin “carving out a bottom”. This will require a lot of patience but is worth the wait.
The best chart patterns for this are shown below and these indicate that the stock could be starting an uptrend.
Let’s take a look at some examples:
From the above chart we can see that Facebook started forming a bottom after it plunged by 50% from its initial highs. The red arrow shows when the stock started forming higher lows in October 2012, the first indication of an uptrend.
Also, by this time the sentiment towards Facebook had soured, making it more attractive.
Linkedin
Linkedin shares rebounded hard after dropping 50% from their initial highs. Then they re-tested those $60 lows again in November 2012 before starting an uptrend. This is more a case of a “double bottom” in chart analysis – a powerful reversal pattern.
Groupon
Groupon suffered the most out of its web stock cousins.
Even though the 50% drop in the stock after its launch did not put a floor in its decline, Groupon did eventually put a floor in at $2.60 in November 2012. Then it began to make higher lows and formed a “head and shoulders” reversal pattern. A sign of an uptrend.
Snapchat IPO (SNAP)
SNAP may defy the historical precedents and do none of the things discussed here. It could turn out that it will be a highly successful IPO and that the stock will “skyrocket to the moon” after its launch.
But I doubt it very much…
Given the huge publicity that this IPO has had which means that “the herd” most likely will be rushing in to buy this stock, I doubt that Snap Inc. (SNAP) will defy history. The herd are usually wrong and they’re probably wrong in this one too.
I will reveal where I think Snapchat is heading – and the level it could eventually form a “bottom” (and thus a buy opportunity) in my next video update.
Hope it helps!
Alessio Rastani