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Snap Stock Goes Up, Goes Down -- Big Deal

By Rick Munarriz - Mar 9, 2017 at 11:10AM

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It's been a wild first five trading days for Snapchat's parent company, but investors need to have a longer perspective.

There's a lot of media attention being generated by Snap, Inc. ( SNAP 5.99% ), and rightfully so. The clip culture darling has been a bucking bronco since going public just a week ago. It's been a wild first five trading days.

  • Underwriters priced the IPO at $17 last week, on Wednesday night, and it soared at the open on Thursday. It opened at $24, closing at $24.48 -- a hearty 44% gain on its first day of trading.
  • Despite a lot of skepticism ahead of the IPO -- with some financial analysts arguing that it was overvalued at the low end of its initial pricing range between $14 and $16 -- the stock rose another 11% on Friday to top $27. The stock closed out its first abridged week of trading with a 59% pop off of its IPO price.
  • Bearishness may have simmered across media outlets over the weekend, but it didn't sap off initial enthusiasm this week. The stock opened higher on Monday, at $28.17, but that's when the wave of selling kicked in. The stock plummeted 12% on the day.
  • Tuesday was the first day in Snap's brief trading history that it opened lower, clearly following through on Monday's sell-off. The pessimism lasted this time. The stock surrendered another 10% on Tuesday.
  • Just when you thought the sell-off would continue with the stock possibly testing its IPO price, Snap bounced back on Wednesday. The stock opened higher, closing 6% higher yesterday.

We'll naturally see how Thursday plays out, but there's no denying that this is going to be a volatile beast. It's Snap. Investors didn't expect anything less.

A Snapchat filter on a smartphone.

Image source: Snap, Inc.

Snap to it 

The sharp sell-off through the first two trading days of this week may be giving the "I told you so" pundits some potent fodder, but that's not fair. The stock has opened higher in four of its first five trading days. Wednesday's close still represents a 34% pop off of last week's IPO price -- or 52% higher than the midpoint of its initial pricing range.

It's going to be tempting to break down Snap Inc.'s daily gyrations, and it will inevitably happen during the stock's first few weeks on the public stage. However, it's also important to remember that the real test -- as the stock bounces around between market caps of $20 billion and $30 billion -- will be Snapchat's success in monetizing its booming traffic flow.

Snap's flagship site is a people eater. It's attracting 158 million daily active users, and that's a metric that will be updated quarterly -- not daily. Snapchat users are publishing 2.5 billion short videos and images a day, but it's Snap's ability to make marketers pay to reach that audience that will dictate which way the stock ultimately goes. 

Investors will forgive the near-term deficits as it ramps up its business. Snap has generated $404.5 million in revenue over the past year, and even bears will have to agree that it's just starting to scratch the surface. The publicity of the IPO itself should draw in new users and advertisers, but the key for the stock's long-term health is if it can complete the monetization process without alienating the users. A lot has happened in Snap's first week on the market, but there's so much left to happen before we call the stock a failure or a success.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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