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Cramer: 2 scenarios that turn Snap into a buy

Abigail Stevenson

With shares of Snap (NYSE: SNAP) falling another 9 percent on Tuesday, Jim Cramer shared two ways that it could turn itself into a buy.

The first is that it could reinvent itself as a place to watch short videos that can be advertised against. The second could be if Snap were the beneficiary of a gigantic amount of advertising money that moved online, much like Domino's (NYSE: DPZ) did for the pizza industry.

Cramer was sick to his stomach when he read stories of millennials buying Snap when it came public last week. He is a believer of owning stocks that you know, but only if the homework is done.

"I just feel terrible about what the younger, new to the market buyers must think right now: that the process is a rip-off, that they were gaffed," the " Mad Money " host said.

If they had done their homework on Snap they would have noticed that Snap has no plans to turn a profit for years, the growth rate is slowing, that it owes $400 million each year to Google (NASDAQ: GOOGL) for its data center and that it is an unproven advertising platform.

Watch the full segment here:

When Cramer spoke with Snap users, they told him they would never click on an ad in Snapchat. And the advertisers don't know that. They are advertising because they are told to, Cramer said, or at least until it doesn't work or Snap's stock really plummets and investors walk away.

More important, Cramer understood how the initial public offering process works, and knew the value would skyrocket and then drop. Institutions that agree to hold the stock — and promise not to flip it — get the IPO price of $17, and then buy more at the $24 opening to get a good average cost basis.

Once the stock hit $28, Cramer was sure syndicate desks would look the other way if the funds wanted to sell given how overvalued it was versus many other social media stocks.

The reality is that when a big IPO is restricted to just 200 million shares for the public and they force the stock to be hot by making institutional buyers pledge not to sell it, some people will be turned off by the IPO process because it doesn't value stocks correctly.

"Only after an IPO is seasoned, which takes months and months and often doesn't happen until insider stock is released from a lock-up, can the valuation stand up to close scrutiny," Cramer said.

These unseasoned buyers bought Snap wrong, and now Cramer hopes that a new generation of buyers wasn't turned off from owning individual stocks or S&P 500 index funds, which is what he says they should have been invested in all along.

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