The next week or two could be even darker for Snap investors than the first few months have been, if you can believe it. The reason is because the Snap lockup expiration is at hand, and it will flood the market with approximately six times as many shares as what the company’s float was in its initial public offering.
Whenever a new set of insider-owned shares is unlocked for trading, it often a period of volatility as those insiders take profits. But this time we’re talking about Snap, which has been under fire even before its IPO. There’s also strong possibility of the Snap lockup expiration boosting short interest levels.
Snap lockup expiration is about to flood the market
The Snap lockup expiration ends at the close of business on Friday, which would mean that all those shares would be available for trade starting on Monday. However, some of those shares might not flood the market until mid-August because of another lockup period surrounding the company’s next earnings report on Aug. 10.
Once all is said and done though, when the Snap lockup expiration is completely over, almost 1 billion more shares will be available for trading. MarketWatch examined a recent study of companies and lockup expirations which keep insiders from selling shares they own in a company.
Snap lockup expiration poses great risks
According to the media outlet, whenever new shares are released after an IPO, stock prices are usually under pressure, but this is especially true of “unprofitable, young, venture-backed companies that see many more shares released than in the actual IPO.” As it turns out, all of these features describe Snap, which means that if you’re one of the intrepid investors holding out for better days, prepare yourself for an even bumpier ride than the one you’ve already been on.
MarketWatch reports that researchers who examined IPOs that have been held since the dot-com burst have found that the firms that have had venture backing “suffered more” when their lockup periods expired. In fact, every one of the venture-backed companies in the study saw its stock fall in the five days around their lockup expirations. These stocks declined by an average of 1.4% more than companies that didn’t have venture backing, after controlling for various factors.
Although that doesn’t sound like much, the media outlet adds that it is a result of a huge sample size with a huge variation in stock movement. In fact, University of Florida Professor Jay Ritter, an expert on IPOs, said it’s “not that rare” for stocks to fall 15% in cases like these, according to the report.
The Snap lockup expiration is even more concerning because its valuation is questionable, as is its track record as well. The number of shares being released in the expiration is six times the IPO float, which is another big concern.
Snap lockup expiration to raise levels of short interest
Short-sellers have been betting against Snap and winning big, although interestingly, financial analytics firm S3 Partners reported earlier this week that short interest in the Snapchat parent fell $273 million this month and now sits at $1 billion. Research head Ihor Dusaniwsky added that short interest peaked on June 1 at $1.44 billion and has fallen with the company’s stock price as some short-sellers covered some of their positions.
Another factor that has decreased the number of shares out on loan is the fact that supply has been tight, resulting in some recalls of shares. Short-sellers have also started to cover because of how expensive it has gotten to borrow the shares. He estimated the number of shares left to borrow at 3 million to 4 million. He added that borrow rates for the stock could surpass fees of 100% leading up to the Snap lockup expiration if most of those shares are taken down.
How many shares will be sold after the Snap lockup expiration?
Recently, CNBC’s Jim Cramer said he didn’t believe that there would be a mass exodus among insiders after the Snap lockup expiration. He noted that the share price has plunged and speculated that insiders might want to wait until it rebounds before they take profits. Those who bought shares in the IPO may be especially motivated to hold onto them because the share price is well below the IPO price.
Dusaniwsky also speculated that there’s “a good chance” the shows won’t be sold immediately and then land in lending accounts. However, he added his estimate that 10% to 30% of the 420 million “early investor” shares might be sold and put into lendable accounts after the Snap lockup expiration. This would add 40 million to 120 million more shares to the lendable pool, possibly as early as next week.
The current lendable pool is only 77 million to 80 million shares, so Snap perma-bears might just be biding their time until this large influx of lendable shares, which will bring borrow costs down. Dusaniwsky expects short interest in the stock to rise to $1.5 billion when the shares become cheaper to borrow.
In a Twilight Zone-like day, Snap shares surged by as much as 4.51% to $14.01 during regular trading hours on Thursday.