What Snap’s Pop & Drop IPO Means For ETFs

March 09, 2017

When Snap, parent company of the Snapchat app, went public last week, it was the hottest initial public offering in more than two years.

Hoping to buy in to the latest social media trend, investors bought up Snap's stock hand over fist, propelling shares higher by 44% in their trading debut. At its peak, Snap was valued at more than $34 billion ($29.44/share) and was up more than 70% from its IPO price.

The flurry of trading in Snap shares was from investors directly buying into the stock. Most ETFs don't own Snap―at least not yet―and that's not necessarily a bad thing.

Pop And Drop

After peaking last Friday, shares of the company lost nearly a third of their value to briefly trade below $21. That's the lowest price for the stock since it began trading on the New York Stock Exchange, though still above the IPO price of $17 (large institutional investors that are clients of the underwriting banks are typically the only ones with access to shares at the IPO price).

If Wall Street analysts are right, the post-IPO swoon in Snap shares may not be over. According to CNBC, not a single analyst has a "buy" rating on the stock, while six have "sell" ratings on it amid concerns about valuations and slowing user growth.  

On the other hand, the company's app boasts a massive 158 million daily active users, and grew revenue sevenfold from 2015 to 2016.

In essence, bulls hope that Snap becomes the next big social media powerhouse like Facebook, while bears pan it was the next Twitter, a hyped-up company that ends up disappointing investors.

No Guarantee Of Place In S&P 500

Given these mixed signals for Snap’s stock, perhaps it's fortunate that most ETFs won't buy in to the company until the dust settles. It will be at least six to 12 months before the committee for the S&P 500 considers including it for inclusion in the large-cap index.

That's just the minimum amount of time. It took even longer for other social media heavyweights to join the index. For Google and Facebook, it was 19 months before they were added to the S&P 500. Meanwhile, Twitter has never been included in the S&P 500 despite being larger than many of the index's other components, highlighting the fact that a big market value doesn't guarantee a spot in the venerable index.

That means it will be awhile―if ever―before investors see Snap as a holding for the SPDR S&P 500 ETF (SPY), the Technology Select Sector SPDR Fund (XLK) and many other funds tied to the S&P 500.

 

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