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Why It's Not A Good Idea To Short An IPO

By Motley Fool Staff - Mar 17, 2017 at 1:06PM

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Tech IPOs are historically notorious for swelling to absurd valuations before crashing back to earth, but shorting them is still dangerous.

After Snap's (SNAP -5.95%) recent IPO, many investors are wondering if it might be a good idea to short the company.

In this clip from The Motley Fool's Industry Focus: Tech podcast, senior analyst Jason Moser explains why it's so dangerous to short a tech IPO, even though the odds may seem to be on your side.

A full transcript follows the video.

This podcast was recorded on March 10, 2017.

Jason Moser: I think it's one thing to read the headlines, especially with these big IPOs that come out, and that's always going to be the bull versus bear pull out of there. I think Snap is the easiest example, but Twitter, certainly. Facebook is another one. Amazon (AMZN -2.49%) is a great example of a business where you've had so many people who have thought for so long, "This just doesn't make any sense, the stock is way too overvalued, they don't earn any money," and it's all because Jeff Bezos reinvests that money into the business. Again, a good example of where you could have gone short on Amazon, and it would have made sense to the extent that the business isn't producing any real earnings. But when you dig deeper, and you understand why it's not producing earnings and what it's doing and the competitive position of the business, and the opportunity, then you recognize why the market is assigning such a hefty valuation -- because really they see that Amazon is looking so far forward with this big opportunity in e-commerce. So, I feel for anybody who was shorting Amazon from that perspective. And I think tech in particular, it's very difficult to go in there and make those kinds of calls. I'm not saying don't short, but certainly, make sure you understand everything involved with it before you do it, because I have heard from one or two investors who have come out on the bad end of that, and it's just really sad to hear.

Dylan Lewis: Yeah. You don't want to dig yourself a hole that you're going to have trouble getting out of.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$106.21 (-2.49%) $-2.71
Snap Inc. Stock Quote
Snap Inc.
SNAP
$13.13 (-5.95%) $0.83

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