Snap, Inc. didn’t wait long to let down its eager investors. Year-over-year, revenues in its first quarter as a public concern were up almost 300 percent, but that badly lagged expectations and even fell short of last quarter’s number. User growth was tepid, as well. The former unicorn gained a mere 8 million new customers over last quarter. The markets don’t tend to like growth stocks that stop growing and Snap’s stock predictably reeled on the news, dropping almost $5 to $18.05, well below its $27 March all-time-high and barely above its $17 IPO price earlier that month. Oh yeah, Snap also lost $2.2 billion dollars, most of it in a one-time non-cash charge for stock-based compensation. At least some people are getting rich off the company. Its shareholders? Not so much.
First and foremost, Snap’s drop is a cautionary tale for anyone tempted to buy into an IPO. Numerous academic studies have shown what a bad idea this is. As a group, newly minted stocks underperform the market over any meaningful time period. The great performance by Snap’s primary competitor Facebook is the exception, not the rule. Most IPOs gap up on the first day of trading, but soon fall off. Many become single digit midgets in a few short years. I’ve been around long enough to see this play out repeatedly across multiple industries. Believe it or not, for a time in the 1980s, the hottest IPOs in the market were in the asbestos abatement business. Like Snap, these companies were afforded grotesque valuations on astronomical growth projections. Like Snap, they all soared on their debuts and gagged shortly thereafter. Many went all the way to zero. A few years later, the IPO craze du jour was CD-Rom education companies. They, too, failed to justify their rich valuations.