Jim Cramer knows no one wants to hear it, but investors shouldn't get caught up in valuations when it comes to an unseasoned initial public offering like Snap.
When a company goes public, often it will hold back stock. In Snap's case, it came public with 200 million shares that trade, and has 1.2 billion that aren't public yet. Thus, the 200 million shares are what's determining the company's $40 billion valuation right now.
"As long as that is the case, we cannot draw real conclusions about what the company might be worth. Once we get the float expanded, and we learn how much advertising love there is for Snap's daily average users, then we will need to think about valuation," the "Mad Money" host said.
Until then, Cramer warned that investors will drive themselves crazy trying to be rigorous about something where rigor doesn't apply.
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It may seem preposterous to some that a company that is losing money and has a stock with no voting rights could be worth $40 billion. However, the IPO process sometimes does lean heavily toward overvaluation, and Snap is apparently a case for that.
"All Snap's executives really wanted was to not be lumped in with Twitter," Cramer said.
Twitter sells for 4 times sales currently, and came public at 13 times sales, although the number quickly went to 20 because of the hype surrounding the company.
Twitter's business peaked fairly soon after it came public, and many investors have fears that Snap could have the same problem, since its growth rate slowed after Facebook launched its Instagram stories.
So, before trying to value Snap, Cramer advised to wait until the rest of the shares are made public and advertising money rolls in. It may not be what people want to hear, but it could save investors from going crazy trying to make sense of something that doesn't make sense.
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