Sna-PO: Ghosts of IPOs Past

My friends, it happened.

Snap Inc. (SNAP), parent company of our “beloved” Snapchat, has finally listed on our favorite exchange, the NYSE.

If your week leading up to Thursday’s IPO was anything like mine, the only financial news your heard was: 1) Snap Inc. was going to list on Thursday, and it would be one of the largest IPOs in recent history; and 2) an overwhelming number of analysts were woefully underwhelmed.

IPO Sizes since 2012

Now, we all know how I feel about the stock, so we won’t get into the nitty-gritty of the company. Instead, let’s take a look at life-after-IPO, and see what SNAP has been looking like since Thursday morning–especially in light of the ghosts of tech IPOs that have come before them.

The immediate post-IPO is just as much of an interesting time for a company as the process leading up to the listing; one filled with showers of money, elation, and a healthy dose of fear that everything they worked towards will collapse before their eyes–normal, right? Well, SNAP experienced a pretty big dose of the all three–especially the shower of money. As I mentioned in the previous piece, when an underwriter prices an IPO, they do so in a way that balances the (low) price desired by the market, and the (high) price desired by the company and the deal underwriters (because that is the point, after all). Even with all the effort of the underwriters, there is still a high possibility of error in pricing an IPO–a direct cause of the market having a hidden demand that they were not able to identify.

On the day of the IPO, the company executives head to the exchange to partake in all of the festivities of the occasion. At the NYSE, there is a big breakfast (and party) with key players, the floor is decorated with the company’s logo, and the executives ring the opening bell. For SNAP, they even had big yellow gift box for the unveiling (and hundreds of selfies).

snap-ipo-e1488469122738
Source: Quartz.com

However, along with the festivities also came a ton of rules that govern the sale of the stock. First and foremost is the post-IPO lockout period, which is the period in which insiders cannot trade the company’s shares. Now, while it’s not an SEC rule, it is tradition for a newly-issued stock to have such a period, which varies from issue to issue, and from insider to insider.

For example, SNAP insiders are split into two sections: those who work for the company, and those who bought the shares prior to the IPO. The employees are restricted from trading for 150 days after the IPO while those early investors (which includes the underwriters, roughly 25% of the outstanding shares), are unable to sell their shares for 365 days. The purpose for the lock-out period is simple: the more shares they can restrict from being traded, the less shares can change hands and add to the volatility of the issue.

This idea of subduing the volatility is key to the entire IPO process. In fact, one of the members of the underwriting syndicate acts as a stabilizing agent, whose responsibility is to trade the stock and keep the price near the initial issue price.

The next important result of an IPO is a the subsequent quiet period, which is much like a Communist news shutdown. In the quiet period, investment banks are not allowed to publish research on the newly public company for a total of 10 days…you know, so that no one can hurt their feelings. That being said, it only applies to investment banks, not independent researchers and the like. To be fair, the SEC has lowered the duration of the quiet period from 25 days down to 10, but most firms will still observe the 25 day period as a sign of respect.

The final, and perhaps most meaningful to the average-investing-joe is the settlement period’s effect on short selling–which effectively gives an IPO a 3 day grace period until they can be shorted. As I’m sure we discussed before, short selling is when an investor borrows shares from another investor in order to sell them on the market. They later have to buy the shares on the open market in order to deliver them to the original owner. The objective is to initiate the short at a high price and close it out at a low price, thereby profiting from the difference.

The problem with short selling an IPO is that very few people have access to the shares in their accounts due to the trades not settling yet (AKA the trades have been made, but the shares haven’t made their way into the investor’s account). Currently, equity trades settle three days after the trade is made, meaning that investors cannot typically short shares until the third day of the stock being traded. In the case of SNAP, which went live on Thursday (March 2nd), traders cannot short the stock until this Tuesday (March 7th)–which is also known as TOMORROW, if you’re reading this on the posting day.

Now let’s look at the IPO of Snap Inc. and see how the entire process came together to be one heck of a wild ride.

The first thing to note is that Snap Inc. was the first U.S. technology IPO of the new year, meaning that investors had been tech-free for too long. That fact, coupled with high gains in the technology sector in the year to date (approximately 11%), made investors drool at the notion of a popular tech company coming to the market. How did that all come together over the past two-and-a-half days?

First, SNAP (initially valued at $17/share) was at 20x its forward 12 month revenue, on-par with mega-giant Facebook at their IPO, but much higher than LinkedIn and Twitter were during their own. By the time the pre-IPO auction was over (where they give large investors a possibility to get in before trading starts, but at a variable price), and the company listed (at 11:20 am) the stock was worth $24 per share–a valuation of $33.3 billion. At 12:10 pm, 117 million shares had been traded on the exchange, with a volume-weighted average price (VWAP) of $24.62. The stock hit its high of $26.05 (53.2% gain from the initial offer price) at 3:06 pm, and closed at $24.48 after shares traded hands 215 million times.

Quite the day, huh? Stacking up against other tech companies, the one who’s IPO market capitalization outshined SNAP was the almighty Facebook, whose market cap before and after the first day was about $80 billion. Snap, however, beat out Google, Twitter, and Amazon (to name a few), showing that they’ve got a pretty hefty business on their hands.

Tech IPO MArket Caps

Regardless of the market cap, the big question in everyone’s minds is: will Snap be a Facebook, monetizing on every facet of their business and blasting out of the gate to stardom? Or will it become a Twitter, where it can’t seem to get it’s ducks (or birds) in a row long enough to make some real money and save its butt? With it closing below its IPO open, we may be looking at the ghost of a certain bird…

SnapCap
Source: Tradingview.com

There are strong opinions from both sides, but one thing remains: take advantage of the buzz while you can, there aren’t many opportunities like this one to make some serious volatility plays–so get in before the fun disappears. 😉

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