What does it mean that shares in Snapchat parent Snap are trading at $22, where just a few days ago they rocketed up 44 percent on their first trading day and closed north of $24?
Maybe nothing. Maybe everything. As has been widely reported, the debut of the stock in U.S. trading brought riches to some investors (and company executives) who had managed to get in at the original pricing of $17, and the shares leaped to the $24-plus level.
And yet: Now those same shares change hands for just under $23, with a 6 percent gain in Wednesday’s (Mar. 8) trading a few hours before the close. That’s still below the recent highs, and it is no busted IPO (commonly defined as a stock that trades lower than its initial offer price).
The stock has a market cap of $26 billion, while the company underpinning the stock has seen losses in the hundreds of millions of dollars. In addition, those who bought shares have no voting rights attached to those shares, so even the largest holders who bought into the IPO have little influence on just what the company might do in the future in terms of strategy.
The euphoria that greeted the stock’s bow might smack of decades past, where each tech issue that came to market had a triumphant march ever upward. The fact remains that this stock market — across all major indices, from the Dow to the tech-laden NASDAQ — has sported an appetite for risk that has not been so prevalent in years. Dow 21,000 followed Dow 20,000 in short order, and these are all psychological barriers that give a leg up, 1,000 points at a time, it seems. High valuations beget high valuations. Sometimes, when these valuations are in the offing, investors and would-be investors look at sales growth as a justification for even higher valuations. In Snap’s case, sales growth has been seven-fold year over year, clocking in at a recent annual tally of $405 million.
Reality is always a tricky beast to wrestle, however, when expectations are so high. Reality may be a stock deflator when Snap reports earnings for the March quarter. Each quarter, of course, makes up a link of sorts that leads to a year — and thus far the Street is expecting 95 percent sales growth next year. That’s a heady rate and a high hurdle, even in these times.