Event Overview: Snap's Three Lockup Period Expirations
Snap Inc. (NYSE: SNAP) shares are down significantly over the last month, after the company reported disappointing first quarter earnings. We expect shares will drop even more this summer with its upcoming lock-up period expirations.
Snap Inc. has three different lockup expiration periods, including a 150-day lockup expiration on July 31, 2017, a 180-day lockup expiration on Aug. 31, 2017, and a one-year lockup expiration on March 2, 2018. Currently 87.4% of Snaps 1.43B shares are restricted from sale under these restrictions. These shares are held by fourteen senior executive and directors and well as several major VC firms (shown below).
Given the stock's recent disappointing performance, we predict company insiders and VC investors are eagerly awaiting the lock-up expiration for their opportunity to dump shares and cash in on gains. Despite the recent tumble, shares are still up 10.9% from its IPO price (market close 6/8). We expect further downslide around the July 31, 2017 and the August 31, 2017 dates as more shares become available for public sale.
The company's first, and largest, lock-up period expires on July 31, 2017. At that time, an additional 844M shares currently restricted will be available for sale on the public market. This represents 59% of the total shares outstanding. These shares are held by fourteen senior executives and directors, as well as several notable VC investors (shown below) who we predict will be eager to sell shares.
(S-1/A)
On August 31, 2017, an additional 358M shares will be available for sale, representing 25% of the total shares outstanding. The shares are held by certain security holders, including its IRA, its standard form of option agreement, and its standard form of restricted stock unit agreement.
Snap Inc. has an additional lock-up expiration on 50M shares (3.4% of total shares outstanding) which is set to expire one year after the offering (3.2.18). However, the restriction on these shares is not binding, and Snap Inc. reserves the right to waive any of these lock-up agreements before the period expires.
(S-1/A)
We reviewed Snap Inc. ahead of its IPO on our IPO Insights Platform. At the time, we recommend investors avoid the deal given the slowdown in growth, huge net losses, and high competition from Facebook (NASDAQ:FB).
We now see even more reason to be bearish on the stock given the approaching events that could put enormous pressure on share price. The stock has fallen significantly following the run-up on its first day of trading, and we predict it has much further to fall.
SNAP's Early Market Performance
With much hype and excitement surrounding the deal, Snap's shares skyrocketed on its first day of trading. The company went public on 3.1.17, pricing its shares at $17, above its initial price range. Shares then jumped 44% on its first day of trading, finishing the day at $24.48. The share price reached a high of $27.09 per share on March 3, 2017, before plunging to $21.44 on March 7, 2017. Since then, shares have continued to slides, taking another significant dip after reporting disappointing first-quarter earnings (summarized below). Currently shares trade at $18.85 (Close 6/8).
Business Summary
Snap Inc. is the creator of the disappearing messaging app, Snapchat launched in 2011. Today, the company has 158M daily active users on its app who send a 2.5 billion snaps each day. In September 2016, the company began selling camera-equipped sunglasses called Spectacles. The sunglasses created much hype at the beginning as the company restricted supply to only pop-up locations in select cities. However, interest has since waned, and the company says it has not generated a significant portion of revenue from the sunglasses.
The company is based in Venice, California and generated $404.5M in revenue in 2016, compared to $58.7M in 2015. Net losses are large, even by start-up standards. Net loss was $514.6M and $372.9M in 2016 and 2015, respectively.
Management team
Evan Spiegel is co-founded Snap Inc., and now serves as CEO. He launched the company along with his co-founder Robert Murphy, when they were students on Stanford University. Robert Murphy serves as the company's chief technology officer.
Financial Performance & First Quarter Report
The company reported first-quarter earnings on 5.10. It reported an EPS of ($2.31) well below analyst estimate of ($0.19) and revenue of $149.65M, also well below analysts' estimate of $157.98M. It increased daily active users by 8M, reaching a total of 166M, but analysts expectations were for an increase to 168M. At the same time, net losses ballooned to $2.2B, largely due to a stock-based compensation expense. Given that much of Snap's value lies on expectations for continued explosive growth, these signs of slowdown are a significant concern for investors. In response, the stock dropped 20% after earnings reports.
Conclusion: Sell or Short Shares Ahead of 7.31 Event
We were bearish on Snap Inc. ahead of its IPO and are even more so now, going into the summer lock-up expirations.
Despite its recent tumble post disappointing earnings, Snap's stock is still up 24% from its IPO price. It appears highly overvalued relative to Facebook, and the technology industry in general.
With more shares becoming available for sale, we expect to see heavy selling activity.
We recommend investors consider selling or shorting shares before insiders have the opportunity to do so once restrictions are lifted. As discussed in previous articles, our firm has found abnormal negative returns in a window of time, ideally (-11, 9) days surrounding the event day (0). View the link for detailed research.
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