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Wall Street braces for end of Snap share lockup
[SAN FRANCISCO] A flood of Snap shares held back since the Snapchat owner's initial public offering could start to trade freely next week, pressuring a stock that has already plunged far below its debut price.
Starting on Monday and extending into August, early investors, employees and other insiders at the Snapchat owner can sell shares for the first time since its US$3.4 billion March IPO, the third-largest ever for a US tech company.
That means the supply of stock on the public market could mushroom in a matter of weeks by hundreds of millions of shares from fewer than 200 million shares.
Demand for Snap shares among investors is already meager after the stock hit five straight record lows this week.
It has sunk nearly 20 per cent below its US$17 IPO price and is down roughly 50 per cent from a record high reached shortly after its debut, dragged lower by investor concerns about user growth and waning confidence in its ability to eventually turn a profit.
"You don't want to be caught in this wave of transactions that will impact the stock in some way," said Philippe Collard, founder of Yabusame Partners, a management consulting firm specialising in the technology industry.
There is one corner of the market that does have use for the stock, as bets against Snap have become so popular that shares available for short selling are hard to come by.
Any shares sold by Snap insiders and employees would add to the supply and could fuel more short selling.
Snap also reports quarterly results on Aug 10, another potential source of pressure.
Its disappointing debut earnings in May prompted a 20 per cent one-day nosedive in the stock.
"There's likely to be a lot of caution and concern related to what the company will report and communicate," said CFRA analyst Scott Kessler.
"The company is taking some hits, starting to take on water."
Snapchat is wildly popular with users under 30, but many on Wall Street are critical of its slowing growth. Snap has warned it may never be profitable, and Facebook's Instagram has been rolling out features that copy Snapchat.
On July 31, early investors including Lightspeed Venture Partners will be able to sell up to 400 million shares, with employees owning another 782 million allowed to start selling on Aug 14, four days after Snap reports results, JPMorgan analyst Doug Anmuth said in a recent note.
Those shares include more than 400 million shares owned by Chief Executive Evan Spiegel and co-founder Robert Murphy.
They and other senior executives are subject to additional rules restricting how many shares they can sell each quarter.
Apart from those limits, 97 per cent of Snap will be potentially available on the stock market by the end of August, up from just 13 per cent now, according to Anmuth.
S3 Partners, a financial analytics firm, believes early investors could sell up to 120 million shares starting on July 31, increasing the supply for short sellers who are currently paying annualised interest rates of more than 60 percent to borrow the stock.
"The stock borrow rates will plummet very quickly," said Ihor Dusaniwsky, S3 Partners' head of research.
"You've got a lot of short sellers that didn't like the trade at a 50 per cent fee, but love it at a 5 per cent fee."
To be sure, the expiry of insider trading restrictions does not always hurt share prices in the short term.
Twitter shares dropped 18 per cent on the day of a key lockup expiry in May 2014.
In November 2012, Facebook jumped 13 per cent the day of a lockup expiry after its IPO.
But experts said lockup expiries tend to hurt companies already on weak footing.
Following its recent share price decline, Snap is valued at 16 times expected revenue, still expensive compared to Facebook at 12 times revenue, according to Thomson Reuters data.
The AdvisorShares Ranger Equity Bear exchange-traded fund shorted Snap after its IPO, and portfolio manager Brad Lamensdorf said he may to do it again if an increased share supply makes borrowing the stock cheaper.
"If it's a really weak story and it's going down, the lockup is going to provide a catalyst for it to go down faster," Mr Lamensdorf said.