Facebook was the hottest initial public offering (IPO) of 2012.
Private companies hold IPOs when they’re about to become public. They do this so they can raise money to grow and expand.
At the time of its IPO, Facebook was a “unicorn.” That’s a private company valued at more than $1 billion.
Investors were clamoring to buy into Facebook. So much so that they pushed up the price even before the company went public.
The initial price range for the IPO was between $28-$35. But when Facebook finally went public, shares sold for $38.
The IPO was on May 18, 2012. A burst of enthusiasm sent the price to $45 that day.
But shares soon crashed… Five months later, the stock had plummeted to $17.55. That’s a 54% drop from the IPO price.
This type of drop-off is common among popular IPOs. After that initial burst of enthusiasm, early investors sell to take profits… and share prices fall.
But Facebook soon rebounded… and it shot up 900% over the next five years.
Today, Facebook has a market cap valued at nearly $500 billion… making it the fifth-largest U.S. company.
I’m telling you about Facebook because another social media company is about to follow the same trajectory. That company is Snap.
Yesterday, I told you that Snap held its IPO on March 2. But I wanted to wait six months before considering it.
Today marks about six months. Here’s why it’s time to start looking at Snap again…
What’s Happening Today
Like Facebook, Snap’s IPO was very popular. And like Facebook, when the initial excitement faded, Snap’s shares trended lower.
That’s why I wanted to wait six months.
Here’s why it pays to be patient with these types of IPOs…
When a company is private, a small number of insiders can buy early shares. These insides include company executives, employees, and venture capitalists.
However, insiders are bound by a “lockup” period when the company goes public. During that period, they can’t sell their private shares.
The lockup period usually lasts about 180 days (six months) after the IPO date.
The market knows that once the lockup period expires, insiders will sell a significant number of their shares.
They’ve been holding their shares for five to 10 years. So the IPO is the first chance for them take some money off the table.
The lockup period varies depending on when the person bought private shares. But for most of Snap’s insiders, the lockup period will have ended today.
That means we can see up to 130 million new shares hit the market—a 20% increase.
Big investors knew this flood of new shares was coming… So they sold off their shares in anticipation. That caused Snap’s share prices to drop.
But here’s the thing…
Once the price drops, big investors jump back in and scoop them up at a lower price. That drives the stock higher again.
The same thing happened to Facebook back in 2013.
As you can see in the chart below, the early price action of Facebook and Snapchat is very similar.
Facebook went from $38 to $17.55. Then it went up to $175. That’s a 900% increase.
Snap appears to have bottomed on August 14… and is now heading higher. If it follows Facebook’s path, it could do the same.
And with nearly 97% of the shares on the market, the selloff is pretty much over. That’s one less thing holding prices back.
Yes, Snap is speculative. But history appears to be repeating itself.
And if history is any guide, today is a good time to consider buying some shares.
Regards,
Nick Rokke, CFA
Analyst, The Palm Beach Daily
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ELITE 25 SEPTEMBER UPDATE
Each month, we update our Elite 25 portfolio. We remove stocks that are too expensive and replace them with new stocks that meet our three criteria for elite status.
August was another rough month for the Elite 25. The portfolio lost 3%, while the S&P 500 was flat for the month.
The system is heavily weighted to retail stocks. And while retailers are still extremely profitable, they’re falling because of the Amazon effect.
Wall Street thinks the online retail giant will hurt all retailers. But not everyone shops online. In fact, 90% of all shopping is still done at brick-and-mortar stores.
There are still a lot of good retailers out there. Eventually, fundamentals will show through in share prices.
The Elite 25 is all about buying quality companies when they are cheap. Right now, retail is cheap.
And it might be turning around… This past month, many retailers jumped higher after being crushed. Elite 25 pick Michael Kors jumped 15% in August.
Big jumps like this are common near a bottom.
Portfolio Changes
We’re removing:
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F5 Networks (FFIV)
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HNI (HNI)
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S&P Global (SPGI)
We’re adding:
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Computer Program & Systems (CPSI)
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Patrick Industries (PATK)
Click here for the updated Elite 25 list.
[Palm Beach Letter subscribers can read our Elite 25 special report right here. If you’re not a PBL subscriber, you can read more about the portfolio here.]
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MAILBAG
From Gerald M.: Miners generate bitcoin. And you say the number of coins are finite. So at some point, they’ll run out of coins to mine. How will the miners make money after the coins are unearthed? If they can’t make money, who keeps the system running?
Nick’s Reply: Gerald, you’re correct about bitcoin mining. Bitcoin caps the number of units at about 21 million. So far, 78% of all bitcoins have already been mined. But mining bitcoins becomes increasingly more difficult, so miners won’t generate the last bitcoin until the year 2140. That tells you how difficult it will be to mine bitcoins going forward.
In addition to mining rewards, miners receive fees from bitcoin transactions. This number was tiny in the early days. Today, transaction fees can be more than $1 million per day. These fees will be even higher as bitcoin adoption increases. The increased fees will more than make up for the lost mining rewards.
If you’re still skeptical about bitcoin and other cryptocurrencies, we want to hear your concerns. Let us know what’s keeping you from investing right here.