Snap Inc. (SNAP), the much-ballyhooed tech stock that went public in early March, has been nothing but bad news for investors. After going public, the company rewarded shareholders with a $2 billion loss in its maiden earnings announcement. Then, its shares fell last Thursday to its $17 IPO price, an ominous sign, down by nearly $7 a share from its opening day of trading.
Now, shares of the social media company could face even more severe downward pressure in the next month, when managers and venture capital owners are free to sell their shares as the so-called "lock-up" period ends.
Of course, there is no surprise that Snap's lock-up expiration is coming as every IPO goes through the same process. It gives the early investors an opportunity to get out of their shares or at least realize some the gains they have garnered. But given Snap's already weak share price, the lock-up expiration is a danger signal for investors because a mammoth 1.1 billion shares will be eligible for sale in the public market, putting huge downward pressure on the shares. The lock-up agreement expires 150 days after the dating of the final IPO prospectus, which takes the expiration to near the end of July.
It's no surprise that short sellers are taking positions in Snap, now accounting for nearly 16.5 percent of the float.
In fact, the stock has attracted so many short sellers that the borrow rate - the cost to borrow shares to short the stock - has escalated in the past month.
Even the options market is betting that Snap shares will fall. There are currently 26,000 puts open at the $20 strikes for July expiration and only 15,000 calls. The $15 strike price has the second highest open interest with January 2018 having nearly 42,000 puts open and roughly 2,000 calls.
Snap and its investors may get a partial reprieve of sorts. The volume of Snap shares for sale after the lock-up may not be as high as the 1.1 billion shares that theoretically could be available. That's because there are three classes of Snap stock: A, B, and C. Class A shares have no votes and have traded since the company went public. Then there's the Class B shares, which have one vote per share. And Class C, which have 10 votes per share.
So let's take a closer look.
Directors and Executives hold about 92 percent of Class C, mainly co-founders Evan Spiegel and Robert Murphy. And of the Class B shares, 30 percent are controlled by executive and directors. These investors are unlikely to choose to erode their voting control by selling too many of these shares. Instead, they would be more likely to sell lots of the class A shares, numbering, 257.87 million, which accounts for 38.6 percent of Class A stock. That would enable these investors to take some profits without giving up control.
The key takeaway here is the bad optics - a possible 1.1 billion shares available to come to market - may not be as bad as many short sellers are betting. Of course, other forces may emerge that put equal pressure on Snap's stock. The company' breathtaking losses and poor stock performance to date already give a sign that the company' investors may be due for more.
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.