Scanning recent IPOs is one of our favorite methods of finding potential new leading stocks, but the key to buying these stocks is patience. Our studies show that many of these IPOs come out with too much hype and fanfare, which leads to a lot of selling and underperformance, which we call the post-IPO droop, observes Mike Cintolo, editor of Cabot Growth Investor.
This droop can last anywhere from a couple of months to two or three years. But the key is that, assuming the stock has sufficient trading volume and good fundamentals, these stocks are usually buyable once they experience a decisive, giant-volume rally, usually on earnings.
The classic example was Facebook (FB). Despite an overall bull market, the stock plunged for its first few months of life, and suffered another dip even after a rally. Altogether, FB had 14 months of lackluster performance. Then came the earnings blastoff in July 2013, and the rest is history. More recent examples include Alibaba (BABA), PayPal (PYPL) and Arista Networks (ANET).
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Now we’re seeing what could be another post-IPO liftoff, this time from Snap Inc. (SNAP), which operates Snapchat, the camera-based app with a cult-like following.
Back in 2012-2013, Facebook struggled from the perception (among other things) that it was falling behind in mobile ads, which was where the industry was clearly moving. It was only when the company released a blowout earnings report with vibrant mobile ad growth that FB kicked off its mega-uptrend.
Similarly, Snap (which had been a dud in the 11 months since it came public) has struggled with a perception that Instagram was going to beat it in the industry, that user growth was topping out and that it wouldn’t be able to monetize its user base. But last week’s quarterly report seems to have calmed a lot of those fears.
Thanks to a new auction-style advertising process and a bunch of new features in its app, Q4 blew away expectations. Not only did revenues grow 72%, but ad revenue surged 38% from the prior quarter, total users leapt 18% from a year ago, and revenue per user lifted 31%, sequentially while costs actually fell!
Analysts now see revenues continuing to ramp (north of 60% both this year and next), and you can see how the stock responded; despite a market meltdown, SNAP soared 37% on its biggest weekly volume since coming public. The day of earnings, the stock surged on more than 10 times average volume, which is usually a major, bullish clue.
This is not to say that Snap is an exact replica of Facebook—Snap has yet to turn a profit, for instance, and it faces more direct competition (from Instagram) than Facebook ever did—but that doesn’t mean the company doesn’t have solid potential. SNAP is on our Watch List.
