Should Millennials buy Snapchat stock?

Pondering Snap's IPO over laser tag and paintball
Pondering Snap's IPO over laser tag and paintball

Buy what you know. It's a philosophy made famous by investing guru Peter Lynch when he was the head of Fidelity's massive Magellan mutual fund. So should Millennials buy shares of Snapchat owner Snap when it starts trading on Thursday?

Snap Inc. is set to debut on the New York Stock Exchange Thursday with the ticker symbol SNAP (SNAP). The company is likely to be valued at above $20 billion as soon as it starts trading.

It's the first of the most high-profile unicorn startups to go public, a list of companies that includes Uber, Airbnb, Elon Musk's SpaceX and Chinese mobile giant Xiaomi.

And it's one of the most eagerly awaited initial public offerings since Twitter (TWTR, Tech30). But that could be a blessing and a curse.

Twitter had a splashy debut, but its stock has since tanked. Facebook (FB, Tech30), on the other hand, had a disappointing first day -- but it's now one of the most valuable companies on the planet.

And many experts see more comparisons to Twitter than Facebook when looking at Snapchat. So young investors should be careful. Buying the stock just because you think the company's filters are cool is not all that smart.

Related: Snapchat's $4 billion man

Snapchat continues to lose money, and some professional investors are worried that user growth is stagnating -- not to mention the fact that the company's user base is smaller than Twitter and Facebook to begin with.

So should young investors take a gamble with Snapchat? It might be wise to wait and see how the stock does instead of buying it on the first day. Some investors think Snap's valuation is too high.

"The biggest problem you have with the old investment adage of 'buy what you know' is that the private markets have become much more efficient at valuing companies. [And] in cases like Snap, overvaluing companies," said Jared Carmel, managing partner with Manhattan Venture Partners, a firm that focuses on private companies.

Carmel added that "Millennials have proven to be fickle."

John Norris, managing director of Oakworth Capital Bank, is also worried about how quickly tastes change in social media. He said his firm has no plans to buy shares of Snap.

Norris added that his teenaged kids use Snapchat, and not Facebook. But they also use Instagram -- which is owned by Facebook.

"My kids tell me Snapchat doesn't have all the ads Facebook has, and that is part of the appeal. However, that is also an important revenue stream for Snap," Norris said.

"What happens to its popularity when it ramps up the ads to turn a profit? Will it still be as popular with Millennials and Generation Z?" Norris added. "Ultimately, IPO hype gives way to show me the money."

But some think Snapchat won't alienate its users the way Twitter arguably has with some of its promoted tweets.

Drew Pascarella, lecturer of finance at Cornell University's Samuel Curtis Johnson Graduate School of Management, pointed out in a report that Snapchat's recent partnership with Pepsi (PEP)-owned Gatorade could be a model for how Snap works with marketers.

Snapchat debuted a new filter during the Super Bowl that made it look like a cooler of Gatorade was getting dumped on your head.

"Snap's ability to attract and entertain users is clear," he said. "The question is -- will they be able to use their place in the social media pecking order to become a premiere destination for digital advertising?"

Related: You can now buy Snapchat Spectacles online

Facebook has found a way to make money off ads and keep users happy. Ditto for Google (GOOGL, Tech30) with its YouTube video service.

Brendan Connaughton, chief investment officer of ClearPath Capital Partners, thinks Snapchat will succeed in attracting more advertisers. He added that the company's hardware, Snapchat Spectacles, could be a nice revenue stream too.

He said his firm has an order to buy some shares of Snap -- but that he is worried about the company's valuation.

As for whether young Snapchat users should buy the stock? He thinks that many, including his own children, would love to ... but could they afford it?

"The problem is that a lot of Snapchat's core users don't have a lot of disposable income. If they did, this would be something they'd look at. But they are burdened with student debt and other financial obligations," he said.

And it while it might seem tempting to try and make a quick buck off the Snapchat IPO in order to pay off student loans or credit card debt, it's not the best of ideas for anyone just trying to make a living.

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