The most high-profile IPO of 2017, Snapchat parent company Snap Inc (NYSE: SNAP), has been a major disappointment for investors up to this point. Roughly four months into its life as a public company, Snap’s stock is already trading more than 7 percent below its IPO price.
Unfortunately for Snap bulls, the stock is staring at another major hurdle coming up in the near future.
On July 29, Snap’s first lock-up restriction period will end. Starting on that date, pre-IPO investors, including company insiders, will be able to sell their shares on the public market for the first time.
Companies implement these lock-up restrictions so IPO investors and other early public buyers will know they won’t be buying into a flood of insider selling. However, once the lock-up period expires, all bets are off.
Even if Snap’s insiders—the underwriters, venture capitalists, and employees who had early access to company shares—have confidence in the long-term prospects for the company, it will be understandably difficult not to cash in thousands, or potentially millions, of dollars of shares and take that money to the bank. That temptation is exactly why Snap traders will be watching Snap closely in the coming weeks.
From a fundamental perspective, the lock-up expiration is unquestionably a bearish event. Like any other asset in a free market, stocks are priced based on supply and demand. By restricting shares throughout the lock-up period, the company is temporarily limiting free-market supply. Once that supply enters the market on July 29, there will be a shift in the supply/demand balance.
However, trading the lock-up expiration isn’t as simple as shorting the stock on July 28. Traders are well aware of these lock-up dates as soon as a stock goes public. Snap shares are down 13 percent in the past month, and much of that selling may have been in anticipation of the lock-up expiration.
At the same time, potential Snap buyers may be waiting in the wings to try to scoop up shares after the lock-up volatility has passed. In other words, there may be more demand out there for Snap shares than it seems.
In fact, in the six months leading up to Facebook Inc (NASDAQ: FB)’s largest lock-up expiration date, the stock was down 48 percent. On the day the lock-up expired, the stock experienced an 11 percent relief rally.
Starting on July 29, more than 1.2 billion Snap shares will become unlocked for the first time. Between the company’s 150-day lock-up expiration on July 29 and its 180-day lock-up expiration a month later, 84 percent of Snap’s shares outstanding will hit the market.
While another 50 million shares will remain restricted until March 2, 2018, the July and August 2017 lock-up expirations are by far the more meaningful trading catalysts for Snap.
Disclosure: the author holds no position in the stocks mentioned.
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