One of the most hotly anticipated IPO’s of 2017 was Snapchat (SNAP).
The stock opened in March 2017 at $24.00 a share. After spiking higher to $29.00, it has since come off a lot.
With all the hysteria around a stock IPO, a more objective analysis of what is going on must occur.
Let’s analyze the stock from an order flow perspective and see if we can see any opportunities.
The IPO was 12x oversubscribed when it was offered to the institutional investors around $17 a share. That is a lot of demand and they thought they were getting a bargain. But in exchange for getting in at this price, many of them cannot sell right away. There is a certain “lock-up” period where they cannot sell. So the institutional investor has to gauge whether or not it is worth it to invest at the IPO price, with the slight disadvantage being there is the lock-up period.
The stock opened at $24.00 a share, and spiked higher to $29.00 in a few days. However, all those institutional investors that got in at $17 cannot sell and take profits yet, because there is a lockup.
As a trader, you can day trade and swing trade SNAP stock of course.
First Principles in an IPO situation
Therefore, the first principle is that when a stock IPO finally starts trading, you have to make a decision on whether the open price represents a trading opportunity or not.
In this case it didn’t. But you don’t have to have hindsight to know that.
If you take a look at what happened with the Facebook (FB) IPO, the stock opened around $42.00. The price eventually fell over -50%, to $18.00 or so, before stabilizing and rising.
So a similar thing could have been assumed for Snapchat, especially if the stock was priced at the high end of the range.
The goal of a company IPO is to raise money. They want to raise money to fund operations and grow. So the company has to make a decision on whether to sell the shares to the IPO investors and extract as much as they can which may mean limited upside potential. Or whether to sell the shares to the IPO investors a bit lower so they get a better deal, but the company raises less money.
FB and SNAP did their best to extract maximum dollars in their IPO. Which means less of an immediate opportunity to buy the stock when they go public.
In such a cases, it is best to be patient and wait.
Just as FB fell by -50% and it was a buying opportunity, so did SNAP fall -50% from the open price and it was a buying opportunity.
See the two charts below:
That was the much more enlightened way to play the stock.
To not be suckered in at the price above $20.00 like so many amateurs got sucked into with all that delusion and irrational emotion.
There was one lady who bought Snapchat stock simply because “it was in the news.” It seemed to be the hot thing at the time and she bought it. I am not sure how many shares she bought. Might have been a few thousand dollars worth. I don’t know when she got out, or if she got out, but she might have lost thousands of dollars.
Her decision was driven by pure emotion. There was no logic. No reason. No good scenario to bet on. No reward risk ratio analysis. There was none of that. It was all purely an emotional decision, without any wisdom in it.
There would have been no reason to lose that money. She could have been a bit smarter.
She could have chosen a different path.
She could have read a good trading book or course. She could have sought knowledge, a process, a blueprint, such as The Perfect Trade Blueprint. If she invested $50 or a few hundred dollars in training, to make herself and her mind more valuable, this situation could have been avoided, and a more profitable outcome could have happened.
If you are ever wondering where your profits from the stock market or currency market come from, they can come from people such as these. It can be from the mom and pop investors. The amateurs. But also from the large hedge funds, pension funds who have billions of dollars. Just because they have so much money, advanced technology, etc, doesn’t mean they always get it right. They do get it wrong sometimes, and when they do there is a wealth transference from them to the smart traders.
Again, I am not saying you should be a robot, without emotions. Emotions are part of life. If you combine them with a bit of wisdom, then you will get better results. Emotion + Wisdom means you are on the path to success.
Stop Losses Were Below $17.00
When Snapchat stock fell below $17.00, there was a gap lower with continuation lower, as this was the IPO price that many institutional investors got in at. This is called a “sentiment/psychological shift” lower type of trading play, that is covered in the Order Flow Mastery Course.
What To Do Now?
Just as years ago if you bought Facebook (FB), it was a very big bet on Mark Zuckerberg. An “alpha” play on him. You were coattaling his networth, with whatever money of yours you invested in the stock.
A very similar situation with a long trade on Snapchat, if you hold it for months or years. It is primarily a bet on the energetic and visionary leader – Evan Spiegel.
However, I would not necessarily go long at the current moment. It is possible there could be one more market correction and you can get in at an even better price.
Snapchat is under some pressure from Facebook’s Instagram. They are all claiming that they are copying each others ideas, etc.
Instagram, owned by Facebook, has about 250 million daily active users, while Snapchat has around 171 million. Instagram has 700 million monthly active users, while Snapchat has about 300 million. Instagram seems to be growing faster too. And a social media stock such as Snapchat can really depend on that daily and monthly active user number.
Can both Instagram and Snapchat coexist successfully?
Can Snapchat branch out away from their dependence on the mobile operating systems? Some analysts say they could become the next Viacom.
These are all good questions.
Also, the younger generation that uses the Snapchat app – can be very fickle. Meaning that they can be using Snapchat this month or this year, and next month or next year, be on to something different. Their tastes and interests can be very volatile. In both fashion and in the Apps that they use. Instagram has established some wide appeal and dominance and Snapchat is certainly trying to do this as well.
There are stop losses building below the recent low, and below the key $10 psychological level.
If they can be triggered, it can cause some capitulation selling by some longs that are disappointed.
And this is where you can swoop in to go long if you still believe in the stock.
I have a price alert at $10.00 and if the stock price gets below it, I will re evaluate the situation and see if it warrants going long. The position size could be small or medium or large depending on my conviction level.
If you enjoy this kind of analysis and find it profitable, then why not check out the Order Flow Mastery Course? Click HERE to get in before any price increases.