Snap tumbles 12% on day three, erases gains

Snapchat parent Snap Inc. debuted on the stock market Thursday and immediately saw substantial gains on its first two days. But the excitement has already worn off, with shares tumbling more than 12 percent on day three.

After finishing Friday at $27.09 per share, Snap closed at $23.77 on Monday, beneath the $24 where it opened on its first day of trading. This is still above the $17 IPO price, but only select institutional investors and high-net worth individuals were able to buy it that low.

“Some of the air is coming out of the stock,” said Kathleen Smith, principal at Renaissance Capital. “The stock had really run up beyond the expectations of most people who look at fundamentals,” she said, referencing Snap’s sub par financials. 

Smith, who also manages IPO-focused ETFs, was surprised by the company’s market cap, which is already about $35 billion (fully diluted). “The company has to basically cure cancer or something with its app,” to justify that kind of value, she quipped.

Snap is already considered to be worth more than American Airlines, Hershey’s and Hilton Hotels, with its sky-high market cap. With the stock trading down today, it seems that some investors are starting to wonder if Snap’s app warrants it. (They also have a hardware product, Spectacles).

But the IPO was generally regarded as a success, with the offering raising $3.4 billion for the company and its team. The strong investor appetite suggests that they could have priced their IPO even higher and raised more than $4 billion.

It’s considered a good sign for other potential tech IPOs that the company was greeted with such enthusiasm. There are many highly valued “unicorns” like Airbnb and Uber that have been sitting on the sidelines.

Many pipeline companies have been afraid to go public because they could have a market cap that’s beneath their last private round. Square was a notable example of this, but is finally trading at its private market valuation of $6 billion.

Time will tell whether Snap will be more like Facebook, which has done great in the public markets, or Twitter, which has had a volatile ride.